Does the forward premium puzzle disappear over the horizon?

Stuart Snaith, Jerry Coakley and Neil Kellard ()

Journal of Banking & Finance, 2013, vol. 37, issue 9, 3681-3693

Abstract: This paper provides the first comprehensive study of the horizon effect in tests of the forward rate unbiasedness hypothesis. It estimates Fama regressions employing 1-month through to 10-year horizon data for the five most heavily traded US dollar currency pairs pre-crisis 1980–2006. In contrast with extant studies, it fully deals with the econometric problems of long horizon regressions by means of a novel heteroskedastic- and autocorrelation-consistent bootstrap. The regression results confirm a clear horizon effect in that the slope coefficient approaches unity as the forward contract maturity is extended. The puzzle disappears at the 3-year horizon and beyond for all currencies.

Keywords: Forward rate unbiasedness; Bootstrap; Horizon effect (search for similar items in EconPapers)
JEL-codes: C15 C22 F31 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:9:p:3681-3693

DOI: 10.1016/j.jbankfin.2013.06.001

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