Abstract

http://ssrn.com/abstract=1474849
 
 

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The Forward Market in Emerging Currencies: Less Biased than in Major Currencies


Jeffrey A. Frankel


Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Jumana Poonawala


Harvard University - Harvard Kennedy School (HKS)

July 24, 2009

HKS Working Paper No. RWP09-023

Abstract:     
Many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But, at least until recently, those studies applied only to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.

Number of Pages in PDF File: 36

Keywords: forward discount, forward premium, bias, puzzle, emerging markets, uncovered interest parity, exchange risk premium, exchange rate

JEL Classification: F31

working papers series





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Date posted: September 21, 2009  

Suggested Citation

Frankel, Jeffrey A. and Poonawala, Jumana, The Forward Market in Emerging Currencies: Less Biased than in Major Currencies (July 24, 2009). HKS Working Paper No. RWP09-023. Available at SSRN: http://ssrn.com/abstract=1474849 or http://dx.doi.org/10.2139/ssrn.1474849

Contact Information

Jeffrey A. Frankel (Contact Author)
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Mailbox 22
Cambridge, MA 02138
United States
617-496-3834 (Phone)
617-496-5747 (Fax)
HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jumana Poonawala
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Cambridge, MA 02138
United States
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