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Forward and Spot Exchange Rates in a Multi-Currency World

75 Pages Posted: 2 Jun 2013 Last revised: 3 Feb 2017

Tarek A. Hassan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Rui C. Mano

International Monetary Fund

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2017


Separate literatures study violations of uncovered interest parity using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based anomalies, to test whether they are empirically distinct, and to estimate the joint restrictions they place on models of currency returns. We find that the forward premium puzzle (FPP) and the "dollar trade" anomaly are intimately linked. Both anomalies are almost exclusively driven by the cross-time component. By contrast, the "carry trade" anomaly is driven largely by the cross-currency component. The simplest model that the data do not reject features a highly persistent asymmetry that makes some currencies pay higher expected returns than others, and a more elastic expected return on the US dollar than on other currencies. In addition, we never reject the hypothesis that currencies with high interest rates are expected to depreciate rather than appreciate, so that none of our estimates require a systematic association between currency risk premia and predictable movements in exchange rates.

Keywords: Carry Trade, Forward Premium Puzzle, Uncovered Interest Parity

JEL Classification: F31, G12, G15

Suggested Citation

Hassan, Tarek A. and Mano, Rui C., Forward and Spot Exchange Rates in a Multi-Currency World (January 1, 2017). Fama-Miller Working Paper; Chicago Booth Research Paper No. 15-02. Available at SSRN: or

Tarek Hassan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Rui Mano

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States


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