Download or read book The Time Horizon of the Forward Premium Puzzle written by Linh Thuy To and published by . This book was released on 2007 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, the forward premium anomaly is revisited. Not only that the forward exchange rate is a biased predictor of the future spot rate, the direction is robustly determined as being opposite to the theoretical prediction under risk-neutral efficient markets hypothesis. The study takes a unique approach by analyzing the time horizon of the forward rate, ranging from one-month to twelve-month maturities, in seven major exchange rates. Classical explanations for the anomaly suggest opposing ideas on whether the maturity horizon affects the degree of bias of the forward rate. We find a consistent pattern describing that the severity of the anomaly increases with the maturity horizon, implying that time-varying risk premium and irrational expectations are still the best candidates for explaining the puzzle. Further, we test and find evidence supporting the time-varying risk premium explanation in a robust framework.