The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped.

exchange rates, forward premium puzzle, futures rates, market efficiency, uncovered interest parity
Foreign Exchange (jel F31), International Finance Forecasting and Simulation (jel F37), Contingent Pricing; Futures Pricing (jel G13)
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Tinbergen Institute

Bernoth, K, von Hagen, J, & de Vries, C.G. (2007). The Forward Premium Puzzle only emerges gradually (No. TI 07-033/2). Discussion paper / Tinbergen Institute. Retrieved from