Predicting exchange rate returns
Paresh Narayan (),
Susan Sunila Sharma,
Dinh Hoang Bach Phan and
Emerging Markets Review, 2020, vol. 42, issue C
We test whether forward premiums predict spot exchange rate returns for 16 currencies. We apply a recently developed time series predictability test that allows us to model data features including heteroskedasticity in forward premium. We discover return predictability for 75% (12/16) of currencies in our sample. Trading strategies show that investors can make more profits from our proposed forward premium model compared to a random walk model and foreign exchange carry trade model.
Keywords: Exchange rate; Forward premium; Heteroskedasticity; Persistency; Endogeneity; Predictability (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:42:y:2020:i:c:s1566014119303504
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