The Forward Premium Puzzle And Risk Premiums

Jun Nagayasu

MPRA Paper from University Library of Munich, Germany

Abstract: This paper re-evaluates the forward premium puzzle using the Euro/US dollar exchange rate. Unlike previous studies, a state-space model is used to measure the significance of this puzzle by estimating the time-specific parameter. Then we provide evidence that the forward premium puzzle became more prominent around the time of the Lehman Shock, and this additional effect of the puzzle is more clearly seen in longer maturity assets. Furthermore, while the risk premium does not tell the whole story about the time-varying puzzle, we show nevertheless that the puzzle can be lessened by this extra factor particularly at times of financial crises.

Keywords: forward premium puzzle; risk premium, time-varying parameters; financial crises (search for similar items in EconPapers)
JEL-codes: F3 (search for similar items in EconPapers)
Date: 2012-09-01
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42472

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