The Common Component in the Forward Premium: Evidence from the Asia-Pacific Region

Jun Nagayasu

MPRA Paper from University Library of Munich, Germany

Abstract: This paper empirically analyzes the behavior of the forward premium. Unlike previous research, we use data from Asia-Pacific countries and adopt the panel data approach (Bai and Ng 2004) which allows us to decompose the forward premium into common and idiosyncratic (country-specific) components. Our data suggest the presence of one common factor and the stationarity of both common and idiosyncratic factors for short maturities, leading to the conclusion of a stationary forward premium. In contrast, the stationarity of the premium is less supported by the longer maturity data. Furthermore, a large portion of the premium fluctuation is shown to be due to a common factor, particularly over the short time horizon, which in turn can be explained by economic and financial developments in the US. In particular, when the US interest rate increases and the economy declines, the common factor tends to fall.

Keywords: Forward premium; common factor; panel unit root test (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2010-08-21
New Economics Papers: this item is included in nep-ifn and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The Common Component in Forward Premiums: Evidence from the Asia–Pacific Region (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24549

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