Working Paper: CEPR ID: DP15817
Authors: Diana Zigraiova; Tomas Havranek; Zuzana Irsova; Jiri Novak
Abstract: A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients in the intervals (0.23,0.45) and (0.95,1.16) for the currencies of developed and emerging countries respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method.
Keywords: forward rate bias; uncovered interest parity; meta-analysis; publication bias; model uncertainty
JEL Codes: C83; F31; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Publication and misspecification biases (C50) | slope coefficients within intervals of 0.23-0.45 for developed economies (F40) |
| Publication and misspecification biases (C50) | slope coefficients within intervals of 0.95-1.16 for emerging economies (C51) |
| Choice of data numeraire currency and estimation method (C51) | systematic influence on coefficients (C51) |
| Publication and misspecification biases (C50) | forward premium puzzle less significant (F31) |
| Negative estimates for specific currencies (Swiss franc and Japanese yen) (F31) | puzzling behavior remains (C92) |
| Corrected mean estimates (C51) | forward premium anomaly not as prevalent (F31) |