The forward premium puzzle and the Euro

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2 Citations (Scopus)

Abstract

This paper evaluates the forward premium puzzle using the Euro exchange rate. Unlike previous studies, our analysis utilizes regime switching methods and is based on two approaches for evaluation of the puzzle; the traditional approach analyzing the sensitivity of interest rate differentials to the forward premium, and the other looking into deviations from the covered interest rate parity (CIRP) condition. Then we provide evidence that the forward premium puzzle indeed became more prominent around the times of the recent crisis periods such as the Lehman Shock and the Euro crisis. This is also shown to be consistent with a deterioration in the CIRP.

Original languageEnglish
Pages (from-to)436-451
Number of pages16
JournalJournal of International Financial Markets, Institutions and Money
Volume32
Issue number1
DOIs
Publication statusPublished - 2014 Sep
Externally publishedYes

Keywords

  • Financial crises
  • Forward premium puzzle
  • Regime switching models
  • Risk premium

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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