Forward premium anomaly of the British pound and the euro |
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| Institution: | 1. Department of Finance and Economics, College of Business Administration, Georgia Southern University, Statesboro, GA 30460, United States;2. The John B. and Lillian E. Neff Endowed Chair in Finance, The University of Toledo, 2801 W. Bancroft Street, Toledo, OH 43606, United States;1. Department of Medical Laboratory, Imaging, and Radiologic Sciences, College of Allied Health Sciences, Augusta University and Augusta University Health System, Health Sciences Campus, 987 St. Sabastian Way, EC-2437, Augusta, GA 30912, USA;2. Department of Chemistry, Case Western Reserve University, Rainbow Babies and Children''s Hospital, Cleveland, OH 44106, USA;3. Department of Pediatrics and Pharmacology, Case Western Reserve University, Rainbow Babies and Children''s Hospital, Cleveland, OH 44106, USA;4. The State Key Laboratory of Analytical Chemistry for Life Science, Collaborative Innovation Center of Chemistry for Life Sciences, School of Chemistry and Chemical Engineering, Nanjing University, Nanjing, Jiangsu 210093, China;5. Department of Mechanical Engineering, Georgia Southern University, 201 COBA Dr., Statesboro, GA 30458, USA |
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| Abstract: | Using pooled data, we study the forward discount bias (FDB) of 24 British pound and 24 euro exchange rates. The results show a FDB during “non-crisis” periods, which is more pronounced for advanced than emerging economies. This finding is especially striking during the period of the European sovereign debt crisis (2010 to 2013), for which we find a FDB for the currencies of advanced economies versus the pound, but not versus the euro. The differences between the results for advanced and emerging country currencies are mainly related to whether the period under investigation is classified as a crisis period or not. Our findings support the literature that relates carry trade activities to the FDB; as such activities are assumed to decrease during times of uncertainty. Further, our study shows evidence for asymmetric behavior with respect to the forward premium, as well as, to the overvaluation and undervaluation of the currency. We find negative slope coefficients for advanced country currencies during crisis periods when the pound and the euro are overvalued and sell at a premium. This suggests that even during crisis periods carry trade activities are present, which may be related to investors' assumptions of higher returns when an overvalued pound or euro is expected to move back to equilibrium. |
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