The common component in forward premiums: Evidence from the Asia-Pacific region

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Abstract

We empirically analyze the behavior of the forward premium. Unlike previous research, we use data from Asia-Pacific countries and adopt a panel data approach that allows us to decompose the forward premium into common and idiosyncratic components. Our data suggest the presence of one common factor and the stationarity of both components for short maturities, leading to the conclusion of a stationary forward premium. In contrast, the stationarity of the premium is less supported by the longer maturity data. Furthermore, a large portion of the premium fluctuation is shown to be due to a common factor, particularly over the short time horizon, which in turn can be explained by economic developments in the USA.

Original languageEnglish
Pages (from-to)750-762
Number of pages13
JournalReview of International Economics
Volume19
Issue number4
DOIs
Publication statusPublished - 2011 Sep 1
Externally publishedYes

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development

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