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Predicting exchange rate returns
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DOI：10.1016/j.ememar.2019.100668.png)
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Abstract
En 中文
We test whether forward premiums predict spot exchange rate returns for 16 currencies. We apply a recently developed time series predictability test that allows us to model data features including heteroskedasticity in forward premium. We discover return predictability for 75% (12/16) of currencies in our sample. Trading strategies show that investors can make more profits from our proposed forward premium model compared to a random walk model and foreign exchange carry trade model.
Keywords:
Exchange rate
Forward premium
Heteroskedasticity
Persistency
Endogeneity
Predictability
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