How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis

Diana Zigraiova, Tomas Havranek and Jiri Novak

No 2020/6, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency´s forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates, which is inconsistent with the forward rate unbiasedness hypothesis. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases we estimate the slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currencies, and estimation methods.

Keywords: Forward rate bias; uncovered interest parity; meta-analysis; publication bias; model uncertainty (search for similar items in EconPapers)
JEL-codes: C83 F31 G14 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-02, Revised 2020-02
New Economics Papers: this item is included in nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6218 (application/pdf)

Related works:
Journal Article: How puzzling is the forward premium puzzle? A meta-analysis (2021)
Working Paper: How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis (2021)
Working Paper: How puzzling is the forward premium puzzle? A meta-analysis (2020)
Working Paper: How puzzling is the forward premium puzzle? A meta-analysis (2020)
Working Paper: How puzzling is the forward premium puzzle? A meta-analysis (2020)
Working Paper: How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis (2020)
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