Exploration of the Foreign Exchange Forward Premiums and the Spot Exchange Return: A Multivariate Approach

Nessrine Hamzaoui and Boutheina Regaieg
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Nessrine Hamzaoui: Faculty of Economic Sciences and Management of Tunis, Tunis El Manar University, Tunisia
Boutheina Regaieg: Faculty of Law, Economics and Management of Jendouba, Tunisia

International Journal of Economics and Financial Issues, 2016, vol. 6, issue 2, 694-702

Abstract: This paper empirically examines the interdependence between the foreign exchange forward premiums and the spot exchange return through a multivariate generalized autoregressive conditional heteroskedasticity type framework. The purpose of this study is to test the correlation sensitivity to shocks and the to capture the dynamic links between the EUR/USD 1, 3, 6, 9 and 12 months forward premiums and the spot exchange return. Our empirical analysis is based on daily data from January 8, 1999 to January 8, 2016. Our daily analysis reveals the presence of high correlations between the unconditional EUR/USD forward exchange premiums at different horizons and the possible effect of asymmetric shocks on the conditional variance. The estimation results show that the dynamic conditional correlations have a relatively small and insignificant autoregressive effect, in addition to the existence of significant correlation sensitivity to shocks

Keywords: Forward Premium Anomaly; Dynamic Conditional Correlation-multivariate Generalized Autoregressive Conditional Heteroskedasticity; Conditional Volatility; Volatility Persistence (search for similar items in EconPapers)
JEL-codes: C22 C58 F31 G15 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2016-02-45

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