Working Paper: NBER ID: w14528
Authors: Stephen Gilmore; Fumio Hayashi
Abstract: We discuss the foreign currency forward premium puzzle in the context of 20 internationally tradable emerging market currencies. We find that since the late 1990s the broad basket of emerging market currencies has provided significant equity-like excess returns against a number of major market currencies, but with low volatility. We also find that the forward premium, or carry, is significant in explaining that excess return but that excess returns would still have existed even in the absence of positive carry. Our calculation shows that transactions cost due to bid/offer spreads is substantially lower than commonly supposed in the academic literature.
Keywords: emerging markets; currency; excess returns; forward premium; carry trade
JEL Codes: F31; G11; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| emerging market currencies (F31) | excess returns (D46) |
| forward premium (G13) | excess returns (D46) |
| other factors (C39) | excess returns (D46) |
| forward premium (G13) | excess returns (D46) |