Forward premium anomaly of the British pound and the euro

Foreign exchange market efficiency during COVID-19 pandemic

“…It has also been argued that forward premium puzzle is driven from the time-varying performance of FX markets across tranquil and turbulent periods ( Ahmad et al, 2012 ; Flood & Rose, 2002 ; Grossmann et al, 2014 ; Levich et al, 2019 ; Lothian & Wu, 2011 ; Shehadeh et al, 2021 ; Zhou & Kutan, 2005 ) due to the existence of a time-variant risk premium component in forward rates ( Abankwa & Blenman, 2021 ; Frankel & Chinn, 1993 ; Hodrick & Srivastava, 1986 ; Kumar, 2020 ; Verdelhan, 2010 ). A related line of research has proposed a crash risk based explanation to the forward premium puzzle, such as Atanasov and Nitschka (2014) , Brunnermeier et al (2009), Daniel et al (2017) , Farhi and Gabaix (2008 and 2016) , and Jurek (2014) .…”

“…One potential explanation for the forward premium puzzle is the existence of a time-variant risk premium component in forward rates ( Abankwa & Blenman, 2021 ; Frankel & Chinn, 1993 ; Hodrick & Srivastava, 1986 ; Kumar, 2020 ; Verdelhan, 2010 ). This explanation has resulted in a flurry of research on the time-varying performance of the FX markets across tranquil and turbulent periods ( Ahmad et al, 2012 ; Flood & Rose, 2002 ; Grossmann et al, 2014 ; Lothian & Wu, 2011 ; Shehadeh et al, 2021 ; Zhou & Kutan, 2005 ). A related line of research has proposed crash risk as an alternative explanation to the forward premium puzzle ( Atanasov & Nitschka, 2014 ; Brunnermeier et al (2009), Daniel et al (2017) , Farhi and Gabaix (2008 and 2016) , and Jurek (2014) .…”

The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies

“…However, they find no evidence supporting the existence of the FPB when they exclude the sup-period of 1980-1987 from their full sample period. Grossmann et al (2014) examine the FPB for EURO and British pound exchange rates against 10 advanced market currencies and 14 emerging market currencies over the period from 1999 to 2013. They divide the whole sample period into three sub-periods: 1999-2007, 2008-2013 and 2010-2013.…”

“…More precisely, it is found that the FPB tends to behave differently over different time periods and across different currency samples. For example, the FPB is found to exist over some time periods but not in other time periods (e.g., Bansal and Dahlquist, 2000;Flood and Rose, 2002;Zhou and Kutan, 2005;Lee, 2011Lee, , 2013Lothian and Wu, 2011;Grossmann et al, 2014;Czech, 2020;Miah and Altiti, 2020). In addition, its severity is found to vary amongst different currencies (e.g., Bansal and Dahlquist, 2000;Frankel and Poonawala, 2010;Loring and Lucey, 2013;Grossmann et al, 2014;Miah and Altiti, 2020).…”