TY  - JOUR
AU  - Clarida,Richard H.
AU  - Taylor,Mark P.
TI  - The Term Structure of Forward Exchange Premia and the Forecastibility of Spot Exchange Rates: Correcting the Errors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4442
PY  - 1993
Y2  - August 1993
UR  - http://www.nber.org/papers/w4442
L1  - http://www.nber.org/papers/w4442.pdf
N1  - Author contact info:
Richard H. Clarida
Columbia University
420 West 118th Street
Room 1111, IAB
New York, NY  10027
Tel: 212/854-3676
Fax: 212/854-8059
E-Mail: rhc2@columbia.edu

Mark P. Taylor
Office of the Dean
Warwick Business School
University of Warwick
Coventry CV4 7AL
UNITED KINGDOM
E-Mail: mark.taylor@warwick.ac.uk
AB  - We present theory and evidence that challenges the view that forward premia contain little information regarding subsequent spot rate movements. Using weekly dollar-mark and dollar sterling data, we find that spot and forward exchange rates together are well represented by a vector error correction model; that there exists exactly the number of cointegrating relationships predicted by a simple theoretical framework and that a basis for this cointegrating space is the vector of forward premia. Dynamic forecasts indicate that the information in the forward premia can be used to reduce the root mean squared forecast error for the spot rate (relative to a random walk forecast) by at least 33 percent at a 6-month horizon and by some 50 to 90 percent at a 1year horizon.
ER  -