The forward premium puzzle and the Euro

Jun Nagayasu

Journal of International Financial Markets, Institutions and Money, 2014, vol. 32, issue C, 436-451

Abstract: This paper evaluates the forward premium puzzle using the Euro exchange rate. Unlike previous studies, our analysis utilizes regime switching methods and is based on two approaches for evaluation of the puzzle; the traditional approach analyzing the sensitivity of interest rate differentials to the forward premium, and the other looking into deviations from the covered interest rate parity (CIRP) condition. Then we provide evidence that the forward premium puzzle indeed became more prominent around the times of the recent crisis periods such as the Lehman Shock and the Euro crisis. This is also shown to be consistent with a deterioration in the CIRP.

Keywords: Forward premium puzzle; Risk premium; Regime switching models; Financial crises (search for similar items in EconPapers)
JEL-codes: F31 F36 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The Forward Premium Puzzle and The Euro (2013)
Working Paper: The Forward Premium Puzzle And The Euro (2013)
Working Paper: The forward premium puzzle and the euro (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:32:y:2014:i:c:p:436-451

DOI: 10.1016/j.intfin.2014.07.004

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