Does the Forward Premium/Discount Help to Predict the Future Change in the Exchange Rate?

Charles A E Goodhart, Patrick C McMahon and Yerima Lawan Ngama

Scottish Journal of Political Economy, 1992, vol. 39, issue 2, 129-40

Abstract: This paper reexamines the relationship between the spot exchange rate depreciation and the forward premium. Many researchers report a negative, and occasionally significant, coefficient when the spot depreciation is regressed on the forward premium. The authors' analysis reveals that such findings are due to the presence of structural breaks and/or outliers in the data. After allowing for these, the forward premium has no information at all about the future change in the spot exchange rate. This finding is a direct implication of the spot rate being, approximately, a random walk and the covered interest parity holding. Copyright 1992 by Scottish Economic Society.

Date: 1992
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Persistent link: https://EconPapers.repec.org/RePEc:bla:scotjp:v:39:y:1992:i:2:p:129-40

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Scottish Journal of Political Economy is currently edited by Tim Barmby, Andrew Hughes-Hallett and Campbell Leith

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