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The Forward Premium Puzzle only emerges gradually

Author

Listed:
  • Kerstin Bernoth

    (De Nederlandsche Bank, and ZEI-University of Bonn)

  • Jürgen von Hagen

    (University of Bonn, Indiana University, and CEPR)

  • Casper G. de Vries

    (Erasmus Universiteit Rotterdam)

Abstract

The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped.

Suggested Citation

  • Kerstin Bernoth & Jürgen von Hagen & Casper G. de Vries, 2007. "The Forward Premium Puzzle only emerges gradually," Tinbergen Institute Discussion Papers 07-033/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20070033
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    References listed on IDEAS

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    More about this item

    Keywords

    exchange rates; market efficiency; forward premium puzzle; uncovered interest parity; futures rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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