Publications
- The Forward Market in Emerging Currencies: Less Biased than in Major Currencies
- Download: PDF 596.51 KB
- by Frankel, Jeffrey; Poonawala, Jumana
- 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 virtually all those studies apply 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.
- Publication Type: WCFIA Working Paper
- Published Date: August 2006
- Field of Interest: International Economics
- Frankel, Jeffrey, and Jumana Poonawala. "The Forward Market in Emerging Currencies: Less Biased than in Major Currencies." Working Paper 2008-0031, Weatherhead Center for International Affairs, Harvard University, September 2004.
- Also NBER Working Paper No. 12496. August 2006.
