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Predicting exchange rate returns
journal contributionposted on 01.01.2020, 00:00 authored by Paresh Narayan, Susan SharmaSusan Sharma, D H B Phan, G Liu
© 2019 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.