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How puzzling is the forward premium puzzle? A meta-analysis

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  • Havranek, Tomas
  • Novak, Jiri
  • Zigraiova, Diana

Abstract

A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method.

Suggested Citation

  • Havranek, Tomas & Novak, Jiri & Zigraiova, Diana, 2020. "How puzzling is the forward premium puzzle? A meta-analysis," MetaArXiv 348kc_v1, Center for Open Science.
    • Handle: RePEc:osf:metaar:348kc_v1
    DOI: 10.31219/osf.io/348kc_v1
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    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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