Title: | THE INFORMATION IN LONG-MATURITY FORWARD RATES: IMPLICATIONS FOR EXCHANGE RATES AND THE FORWARD PREMIUM ANOMALY |
Authors: | Boudoukh, Jacob Richardson, Matthew Whitelaw, Robert F. |
Issue Date: | 16-Nov-2005 |
Series/Report no.: | SC-AM-05-12 |
Abstract: | The forward premium anomaly is one of the most robust puzzles in financial economics. We recast the underlying parity relation in terms of cross-country differences between forward interest rates rather than spot interest rates with dramatic results. These forward interest rate differentials have statistically and economically significant forecast power for annual exchange rate movements, both in- and out-of-sample, and the signs and magnitudes of the corresponding coefficients are consistent with economic theory. Forward interest rates also forecast future spot interest rates and future inflation. Thus, we attribute much of the forward premium anomaly to the anomalous behavior of shortterm interest rates, not to a breakdown of the link between fundamentals and exchange rates. |
URI: | http://hdl.handle.net/2451/26622 |
Appears in Collections: | Asset Management |
Files in This Item:
File | Description | Size | Format | |
---|---|---|---|---|
S-AM-05-12.pdf | 271.58 kB | Adobe PDF | View/Open |
Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.