TY  - JOUR
AU  - Frankel,Jeffrey
AU  - Poonawala,Jumana
TI  - The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12496
PY  - 2006
Y2  - August 2006
UR  - http://www.nber.org/papers/w12496
L1  - http://www.nber.org/papers/w12496.pdf
N1  - Author contact info:
Jeffrey A. Frankel
Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-3834
Fax: 617/496-5747
E-Mail: jeffrey_frankel@harvard.edu

Jumana Poonawala
1500 Chestnut Street
Apt 15B
Philadelphia, PA 19102
E-Mail: jumana@post.harvard.edu
AB  - any studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But virtually all those studies apply to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.
ER  -