Forward premium anomaly

The forward premium anomaly in currency markets (also referred to as the forward premium puzzle or the Fama puzzle) refers to the well documented empirical finding that the domestic currency is expected to appreciate when domestic nominal interest rates exceed foreign interest rates.[1] This is puzzling because economic theory suggests that if all currencies are equally risky investors would demand higher interest rates on currencies expected to fall in value. See: Forward exchange rate# Unbiasedness hypothesis.

References

  1. ↑ Fama, Eugene (1984), "Forward and spot exchange rates", Journal of Monetary Economics 14 (3): 319–338, doi:10.1016/0304-3932(84)90046-1

See also