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Predicting exchange rate returns

Paresh Narayan (), Susan Sunila Sharma, Dinh Hoang Bach Phan and Guangqiang Liu

Emerging Markets Review, 2020, vol. 42, issue C

Abstract: 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)
Date: 2020
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DOI: 10.1016/j.ememar.2019.100668

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