Predicting exchange rate returns

Paresh Kumar Narayan; Susan Sunila Sharma; Dinh Hoang Bach Phan; Guangqiang Liu

doi:10.1016/j.ememar.2019.100668

Predicting exchange rate returns

Paresh Kumar Narayan, Susan Sunila Sharma, Dinh Hoang Bach Phan, Guangqiang Liu

Research output: Contribution to journal › Article › Research › peer-review

13 Citations (Scopus)

Abstract

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.

Original language	English
Article number	100668
Number of pages	16
Journal	Emerging Markets Review
Volume	42
DOIs	https://doi.org/10.1016/j.ememar.2019.100668
Publication status	Published - Mar 2020
Externally published	Yes

Keywords

Endogeneity
Exchange rate
Forward premium
Heteroskedasticity
Persistency
Predictability

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10.1016/j.ememar.2019.100668

Cite this

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abstract = "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.",

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author = "Narayan, {Paresh Kumar} and Sharma, {Susan Sunila} and Phan, {Dinh Hoang Bach} and Guangqiang Liu",

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AU - Phan, Dinh Hoang Bach

AU - Liu, Guangqiang

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AB - 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.

KW - Endogeneity

KW - Exchange rate

KW - Forward premium

KW - Heteroskedasticity

KW - Persistency

KW - Predictability

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JO - Emerging Markets Review

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Predicting exchange rate returns

Abstract

Keywords

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