The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies

Ali A. Shehadeh, Youwei Li, Samuel A. Vigne, Mohammad I. Almaharmeh and Yizhi Wang

International Review of Financial Analysis, 2021, vol. 78, issue C

Abstract: In this paper we investigate the forward premium bias (FPB) puzzle for a number of developed and developing country currencies. Our main objective is to examine the possible variations in the existence and severity of the bias for different currency sets over two sample periods which can be categorized as calm and turbulent periods. We find significant evidence that the FBP tend to vary over time and across currency sets. We also find that the global financial crisis has been a turning point in the variation of the existence and severity of the bias for our currency sets. The results show that different currency sets have been affected by the crisis in different patterns. While the bias disappeared prominently for developed country currencies with the peak of the crisis, it survived and became more pronounced for some high-yielding developing country currencies. The results imply that the FPB is time-varying and its existence and severity vary across and within currency sets depending on the time period under consideration. Overall, the findings of the paper suggest that both time period-specific characteristics as well as currency-specific factors play a vital role for the existence and severity of the FPB.

Keywords: Forward premium bias; Foreign exchange; Global financial crises; Covered and uncovered interest rate parities; Advanced and emerging market currencies; Currency carry trade returns (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002003

DOI: 10.1016/j.irfa.2021.101871

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