Trading the Forward Bias: Are There Limits to Speculation?

Foreign exchange market efficiency under recent crises: Asia-Pacific focus

“…Burnside et al (2007); Galati et al (2007); Clarida et al (2009);Hochradl and Wagner (2010)]. Our results show that this trading strategy may not be a wise one as the forward bias puzzle is only a temporary phenomenon waiting for market correction.…”

“…We witness the reversal of fortune for carry trade when the estimated Fama beta turns from negative to positive which happened throughout our sample period. Therefore we do not think that the recommendation from Hochradl and Wagner (2010) regarding the superiority of carry trade as a trading strategy is a sound one. Of course, our paper has the benefit of hindsight to include the GFC which Hochradl and Wagner (2010) does not.…”

Emerging Markets and Financial Resilience

“…However, this problem has persisted. Some recent studies (e.g., Ahmad et al, 2012;Frankel & Poonawala, 2010;Hochradl & Wagner, 2010) show that the forward exchange rates are still biased predictors of future spot exchange rates. The Fama regression is portrayed as follows:…”

The solution to the forward-bias puzzle

“…For a discussion of this puzzle and a review of the literature see Sarno (2005). Some of the more recent articles include Baillie and Kiliç (2006), Nickolaou and Sarno (2006), Sarno et al (2006), Sercu and Vinaimont (2006), Kearns (2007), Chakraborty and Haynes (2008), Chakraborty and Evans (2008), Wang and Wang (2009), Bacchetta and van Wincoop (2010), Frankel and Poonawala (2010) and Hochradl and Wagner (2010). For examples of such estimates using the data described later, see Table 1.…”