Asia-Pacific Currency Excess Returns

Yuen-Meng Wong

Chapter 7 in Emerging Markets and Financial Resilience, 2013, pp 109-126 from Palgrave Macmillan

Abstract: Abstract In a rational and risk-neutral setting, the forward exchange rate should be an unbiased predictor of the future spot exchange rate. However, there is a wide body of literature indicating the failure of the forward exchange rates to provide an unbiased prediction to the future spot exchange rate. According to Froot and Thaler (1990), the forward rates are not only biased but also systematically wrong as evidenced by the widespread finding of negative beta coefficient in the regression of changes in spot exchange rates on the lagged forward premium. The average value of the negative beta coefficient among 75 published papers is −0.88 (Froot & Thaler, 1990). This phenomenon has come to be known as the forward bias puzzle1 (Obstfeld & Rogoff, 2000; Sarno, 2005). The forward bias puzzle has now become one of the classic issues in the field of international finance which remains unresolved. The failure of the forward exchange rate to provide unbiased prediction for future spot exchange rate proves to be a persistent phenomenon among the developed countries’ currency. The failure of the unbiasedness hypothesis indicates the existence of currency excess returns (CER) from trading the forward exchange rates (Villanueva, 2007). As compared to the developed country currencies, the Asia-Pacific currencies are under-researched. This study attempts to fill the gap regarding the characteristics of the CER for the Asia-Pacific currencies.

Keywords: Exchange Rate; Risk Premium; Foreign Exchange Market; Calendar Effect; Chinese Yuan (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-26661-3_7

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DOI: 10.1057/9781137266613_7

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