The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies

Jeffrey Frankel and Jumana Poonawala
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Jumana Poonawala: Harvard University

Working Paper Series from Harvard University, John F. Kennedy School of Government

Abstract: Many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But, at least until recently, those studies applied only to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: The forward market in emerging currencies: Less biased than in major currencies (2010)
Working Paper: The Forward Market in Emerging Currencies: Less Biased than in Major Currencies (2009)
Working Paper: The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:harjfk:rwp09-023

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