Skip navigation
Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27382
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.: S-DRP-05-06
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/2451/27382
Appears in Collections:Derivatives Research

Files in This Item:
File Description SizeFormat 
S-DRP-05-06.pdf208.98 kBAdobe PDFView/Open


Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.