How puzzling is the forward premium puzzle? A meta-analysis

Tomas Havranek, Jiri Novak and Diana Zigraiova

No 348kc_v1, MetaArXiv from Center for Open Science

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. 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 yields 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 currency, and estimation method.

Date: 2020-09-07
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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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Persistent link: https://EconPapers.repec.org/RePEc:osf:metaar:348kc_v1

DOI: 10.31219/osf.io/348kc_v1

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