Forward Premiums and Market Efficiency: Panel Unit-root Evidence from the Term Structure of Forward Premiums

John Barkoulas, Christopher Baum and Atreya Chakraborty ()

No 461, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test--the Johansen likelihood ratio (JLR) test--to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.

Keywords: Forward premium; currency risk premium; panel unit-root tests; foreign exchange market efficiency (search for similar items in EconPapers)
JEL-codes: F30 F31 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2000-06-09, Revised 2001-06-13
New Economics Papers: this item is included in nep-ets and nep-ifn
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Citations: View citations in EconPapers (2)

Published, Journal of Macroeconomics, 25(1), 109-122, 2003

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Journal Article: Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:461

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