Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums

John Barkoulas; Christopher F. Baum; Atreya Chakraborty

doi:10.1016/S0164-0704(03)00009-0

Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums

John Barkoulas, Christopher F. Baum, Atreya Chakraborty

Finance

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

11 Scopus citations

Abstract

A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test - the Johansen likelihood ratio (JLR) test - to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.

Original language	English
Pages (from-to)	109-122
Number of pages	14
Journal	Journal of Macroeconomics
Volume	25
Issue number	1
DOIs	https://doi.org/10.1016/S0164-0704(03)00009-0
State	Published - Mar 2003

Scopus Subject Areas

Economics and Econometrics

Keywords

Currency risk premium
Foreign exchange market efficiency
Forward premium
Panel unit-root tests

Access to Document

10.1016/S0164-0704(03)00009-0

Cite this

@article{5ebd9d9276b74c53a078956c481fe135,

title = "Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums",

abstract = "A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test - the Johansen likelihood ratio (JLR) test - to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.",

keywords = "Currency risk premium, Foreign exchange market efficiency, Forward premium, Panel unit-root tests",

author = "John Barkoulas and Baum, {Christopher F.} and Atreya Chakraborty",

year = "2003",

month = mar,

doi = "10.1016/S0164-0704(03)00009-0",

language = "English",

volume = "25",

pages = "109--122",

journal = "Journal of Macroeconomics",

issn = "0164-0704",

publisher = "Elsevier B.V.",

number = "1",

}

TY - JOUR

T1 - Forward premiums and market efficiency

T2 - Panel unit-root evidence from the term structure of forward premiums

AU - Barkoulas, John

AU - Baum, Christopher F.

AU - Chakraborty, Atreya

PY - 2003/3

Y1 - 2003/3

N2 - A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test - the Johansen likelihood ratio (JLR) test - to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.

AB - A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test - the Johansen likelihood ratio (JLR) test - to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.

KW - Currency risk premium

KW - Foreign exchange market efficiency

KW - Forward premium

KW - Panel unit-root tests

UR - http://www.scopus.com/inward/record.url?scp=0346903216&partnerID=8YFLogxK

U2 - 10.1016/S0164-0704(03)00009-0

DO - 10.1016/S0164-0704(03)00009-0

M3 - Article

AN - SCOPUS:0346903216

SN - 0164-0704

VL - 25

SP - 109

EP - 122

JO - Journal of Macroeconomics

JF - Journal of Macroeconomics

IS - 1

ER -

Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums

Abstract

Scopus Subject Areas

Keywords

Access to Document

Other files and links

Fingerprint

Cite this