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

Diana Zigraiova, Tomas Havranek, Zuzana Irsova and Jiri Novak

European Economic Review, 2021, vol. 134, issue C

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 3643 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 in the intervals (0.23,0.45) and (0.95,1.16) for the currencies of developed and emerging countries 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.

Keywords: Forward rate bias; Uncovered interest parity; Meta-analysis; Publication bias; Model uncertainty (search for similar items in EconPapers)
JEL-codes: C83 F31 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Working Paper: How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis (2021)
Working Paper: How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis (2020)
Working Paper: How puzzling is the forward premium puzzle? A meta-analysis (2020)
Working Paper: How puzzling is the forward premium puzzle? A meta-analysis (2020)
Working Paper: How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:134:y:2021:i:c:s0014292121000672

DOI: 10.1016/j.euroecorev.2021.103714

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