Speculative trading and its effect on the forward premium puzzle: new evidence from Japanese yen market

Katarzyna Czech ()
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Katarzyna Czech: Warsaw University of Life Sciences – SGGW, Institute of Economics and Finance, Department of Econometrics and Statistics

Bank i Kredyt, 2020, vol. 51, issue 2, 167-188

Abstract: The aim of the paper is to investigate a forward premium anomaly in reference to the speculation strategy carry trade. The article focuses on the Japanese yen. The paper shows that the existence of the puzzle is highly dependent on the frequency of crisis episodes, the sign and size of the interest rate differential, and the attractiveness of the currency as a target or funding one in carry trade. The study shows that the uncovered interest parity holds during a high-volatility period and the forward premium anomaly arises in a low-volatility regime. However, the anomaly does not appear for all tested exchange rates. For currency pairs with a high interest-rate differential, it seems to apply to the exchange rates where a high-yielding currency is perceived as an attractive target currency. In turn, for currency pairs with slightly different interest rates, it depends highly on the sign of interest rate differential and the currency’s attractiveness as a funding currency.

Keywords: forward premium anomaly; speculation; carry trade; Japanese yen; Markov switching regression (search for similar items in EconPapers)
JEL-codes: C58 E44 F31 G12 G14 G15 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpbik:v:51:y:2020:i:2:p:167-188

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