Forward Foreign Exchange Rates, Expected Spot Rates, and Premia: A Signal-Extraction Approach

Christian Wolff

Journal of Finance, 1987, vol. 42, issue 2, 395-406

Abstract: The author implements a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal-extraction techniques from the engineering literature. Diagnostic tests indicate that these methods are successful in capturing the essence of the time-series properties of premia. The estimated premium models indicate that premia show a certain degree of persistance over time and that more than one-half of the variance in the forecast error that results from the use of current forward rates as predicators of future spot rates, is accounted for by variation in premium terms. Copyright 1987 by American Finance Association.

Date: 1987
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