The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies

Shehadeh, Ali A.; Li, Youwei; Vigne, Samuel A.; Almaharmeh, Mohammad I.; Wang, Yizhi

Abstract

In this paper we investigate the forward premium bias (FPB) puzzle for a number of developed and developing country currencies. Our main objective is to examine the possible variations in the existence and severity of the bias for different currency sets over two sample periods which can be categorized as calm and turbulent periods. We find significant evidence that the FBP tend to vary over time and across currency sets. We also find that the global financial crisis has been a turning point in the variation of the existence and severity of the bias for our currency sets. The results show that different currency sets have been affected by the crisis in different patterns. While the bias disappeared prominently for developed country currencies with the peak of the crisis, it survived and became more pronounced for some high-yielding developing country currencies. The results imply that the FPB is time-varying and its existence and severity vary across and within currency sets depending on the time period under consideration. Overall, the findings of the paper suggest that both time period-specific characteristics as well as currency-specific factors play a vital role for the existence and severity of the FPB.

Citation

Shehadeh, A. A., Li, Y., Vigne, S. A., Almaharmeh, M. I., & Wang, Y. (2021). The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies. International review of financial analysis, 78, Article 101871. https://doi.org/10.1016/j.irfa.2021.101871

• Journal Article Type: Article
• Acceptance Date: Aug 18, 2021
• Online Publication Date: Aug 21, 2021
• Publication Date: Nov 1, 2021
• Deposit Date: Aug 22, 2021
• Publicly Available Date: Feb 22, 2023
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 78
• Article Number: 101871
• DOI: https://doi.org/10.1016/j.irfa.2021.101871
• Keywords: Forward premium bias; Foreign exchange; Global financial crises; Covered and uncovered interest rate parities; Advanced and emerging market currencies
• Public URL: https://hull-repository.worktribe.com/output/3825743