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This paper contributes to the empirical literature on the forward premium anomaly by investigating possible statistical explanations for this puzzling phenomenon in the energy market. To this end, time series of spot and different forward maturities for West Texas Intermediate (WTI) crude oil and Reformulated Gasoline Blendstock for Oxygen Blending (RBOB) traded on the New York Mercantile Exchange (NYMEX) over the period 1986–2018 are used. The statistical properties of the spot and forward premium time series are examined by using unit root tests with structural breaks and a long memory process. The time-varying slope coefficient of regressing spot returns on the lagged forward premium is then estimated via the rolling sample technique and the state space model using the Kalman filter. The empirical results provide strong support for the presence of multiple structural breaks and long memory in the forward premium of the crude oil and RBOB energy time series in contrast to the spot returns series, which are stationary. The results also show evidence for time-varying beta coefficients for all the energy maturities considered. Overall, there is strong evidence for the forward premium anomaly with a larger negative slope parameter for the crude oil compared to the regular RBOB gasoline. The rejection of the forward rate unbiasedness hypothesis suggests that the futures price cannot play a significant role in price discovery.

We examine how China’s capital controls affect the volatility of the renminbi (RMB) covered interest deviation (CID). We find that capital controls not only drive up the level of the RMB CID, but also cause the CID to be more volatile, highlighting the tradeoff between the role of capital controls in maintaining financial stability and hindering financial market efficiency. We also find that capital controls result in greater CID volatility in more liberalized RMB exchange regimes. Furthermore, we decompose CID into the interest rate differential (IRD) and forward premium (FP) and find that capital controls normally amplify the volatility of both. However, during the Federal Reserve Bank’s quantitative ease era, capital controls mitigated the volatility of the IRD. Finally, using an error correction model, which enables us to study the association of capital controls with both long-run and short-run volatility simultaneously, we find that, while capital controls increase both the long- and short-run volatility of the IRD and the CID overall, they do not affect FP volatility.

This paper investigates whether currencies enhance performance of portfolios diversified over a number of different international markets from the perspective of an American based investor and determines what is the source and the extend of the added value. While the US market is considered to be the largest in the world, emerging markets are smaller, more volatile and contain more inherent risks but they do present huge potential and diversification opportunities for investors. Hence adding these foreign investments into their portfolios present risk reduction benefits for investors but it exposes them to the notion of currency risk. Hedging currency exposure could help mitigate those risks but it at what cost? It is indeed shown that hedging levels have different impacts on performance but also on the volatility associated with those investments. This paper aims at showing this risk-return dilemma, and explore optimal hedging strategies to mitigate against currency exposures in American emerging markets. Este artigo investiga se as moedas melhoram o desempenho de portfólios diversificados em vários mercados internacionais diferentes na perspectiva de um investidor baseado nos EUA e determina qual é a fonte e a extensão do valor agregado. Embora o mercado dos EUA seja considerado o maior do mundo, os mercados emergentes são menores, mais voláteis e contêm mais riscos inerentes, mas apresentam um enorme potencial e oportunidades de diversificação para os investidores. Assim, a adição desses investimentos estrangeiros às suas carteiras apresenta benefícios de redução de risco para os investidores, mas os expõe à noção de risco cambial. A cobertura da exposição cambial poderia ajudar a mitigar esses riscos, mas a que custo? De facto, é demonstrado que os níveis de cobertura têm diferentes impactos no desempenho, mas também na volatilidade associada a esses investimentos. Este artigo tem como objetivo mostrar esse dilema de risco-retorno e explorar as melhores estratégias de hedge para mitigar as exposições cambiais nos mercados emergentes americanos.

Theoretically, exchange rate fluctuations should be positively related to interest-rate differential. This paper empirically examines whether such a relationship holds between EUR/RSD exchange rate and the corresponding interbank interest rates. Estimates on daily data between 2008 and 2015 obtained from a linear regression model indicate that this relationship is in fact negative, consistent with the forward premium anomaly. The result persists over different time horizons. The exchange-rate predictability builds over time. The uncovered interest-rate parity does not hold.

With the increasing share of volatile renewable energies, weather prediction becomes more important to electricity markets. The weather-driven uncertainty of renewable forecast errors could have price increasing impacts. This research sets up an analytic model to show that the day-ahead optimal bidding under uncertain renewable production is below the expected production and thus price increasing. In a second step, the price increasing effect on forward premiums by specific weather types and their renewable production uncertainty is proved via empirical methods. Weather types are identified in which renewable production is harder to predict. The findings connect weather dependent renewable forecast uncertainty to forward premiums and support the consideration of weather types in price forecasting models.

This paper provides a comprehensive evaluation of the short-horizon predictive ability of economic fundamentals and forward premiums on monthly exchange-rate returns in a framework that allows for volatility timing. We implement Bayesian methods for estimation and ranking of a set of empirical exchange rate models, and construct combined forecasts based on Bayesian model averaging. More importantly, we assess the economic value of the in-sample and out-of-sample forecasting power of the empirical models, and find two key results: (1) a risk-averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and (2) strategies based on combined forecasts yield large economic gains over the random walk benchmark. These two results are robust to reasonably high transaction costs. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

O objetivo principal do trabalho foi avaliar o risco cambial presente na estrutura a termo da taxa de juros brasileira por modelos VAR, entre 2002 e 2014, buscando identificar variáveis observáveis, macroeconômicas e não observáveis, de forma a justificar esse prêmio de risco e suas variações na curva de juros. O risco cambial para o caso brasileiro é extraído do Forward Premium, que foi calculado pelas diferenças das curvas DI futuras de 1 dia e do FRA de Cupom Cambial. Dessa diferença são extraídas as expectativas inflacionárias entre as moedas, restando o prêmio cambial por vértice, dado como o excesso de retorno a ser modelado. Apresentam-se duas proposições principais. No primeiro modelo utilizam-se variáveis macroeconômicas como inflação e produto, somadas a fatores de incerteza como o risco país e variáveis latentes. Em uma proposição restrita à arbitragem, apresenta-se um modelo VAR Gaussiano em espaço de estados para a geração das variáveis não observáveis, somadas à aplicação dos coeficientes macroeconômicos. Assim, é gerada uma estrutura para a compreensão do risco cambial em distintos vértices, conforme aplicado por Ang e Piazzesi (2003) na modelagem da estrutura a termo da taxa de juros. Compreende-se, ainda, o risco cambial como o prêmio excedente à desvalorização esperada, formando o excesso de retorno da curva de juros. No segundo modelo avalia-se o risco cambial baseado na mensuração do Forward Premium Puzzle (fpp) ocorrido e em variáveis latentes. Vinculam-se, ainda informações de curto prazo afetando a formação do longo prazo. Conclui-se que as estruturas de curto e longo prazo podem ser fundidas em métodos com vistas a ampliar as possibilidades de utilização dessas estimativas. Identifica-se, também, a importância da memória recente para a formação do risco cambial. Adiciona-se o argumento desses modelos se fundamentarem na hipótese de expectativas racionais da estrutura a termo da taxa de juros. Por último, evidencia-se que técnicas voltadas ao estudo e modelagem da estrutura a termo da taxa de juros são aplicáveis na formação dos prêmios cambiais e que estes possuem comportamento a termo por vencimento relacionado. The main objective of the present study was to evaluate the currency risk in the Brazilian term structure of interest rate structure by VAR models, between 2002 and 2014, aiming to identify observable, macroeconomic and non-observable variables, in order to substantiate such risk premium and its variations on the interest curve. The currency risk in the Brazilian scenario is obtained from the Forward Premium, which was calculated by the differences on the curves of one-day future DI and the FRA de Cupom Cambial (Forward Rate Agreement of Exchange Coupon). From this difference, we obtain the inflationary expectations among currencies resulting in the exchange premium per maturity given as excess return to be modeled. Two main proposals are presented. In the first model, macroeconomic variables, such as inflation and product, are utilized in addition to uncertainty factors such as country risks and latent factors. Under a restricted arbitrage proposal, a VAR Gaussian state-space model was presented to obtain the non-observable variables in addition to the application of macroeconomic factors. Thus, a structure for understanding the currency risk is provided under different maturities, as applied by Ang and Piazzesi (2003) in the modeling of the term structure of interest rate. It is further understandable that the currency risk is an excess premium in relation to the expected devaluation, and an excess return in the curve of interests. In the second model, the currency risk assessed is based on the measurement of the occurred Forward Premium Puzzle (FPP) as well as in latent factors. It also entails short-term data, which affects the long-term perspective. In conclusion, the structures of short- and long-term can be merged into methods in order to broaden the possibilities of utilizing these estimates. Furthermore, the importance of recent data in the construction of the foreign exchange risk is herein observed, and the point that these models are rooted in the rational expectations theory of the term structure of interest rate is duly noted. Lastly, it has become evident that techniques targeted at the study and modeling of the term structure of interest rate are applicable in the formation of foreign exchange premia, and that these show a forward pattern for related maturity

The forward rate is often used as the market's prediction of the future spot exchange rate even though the hypothesis that the forward rate is an unbiased predictor of the future spot rate has been rejected in a large number of empirical studies using data for different countries and time periods. The rejection of this hypothesis could occur because market behaviour is inconsistent with rational expectations or because of the existence of a risk premium. Existing studies test for one or the other, but not both, of these factors. In this paper, equations describing the forward premium and the change in the exchange rate are estimated jointly, and tests of both the rational expectations and no risk premium hypotheses are conducted. The empirical estimates, obtained using quarterly data for the yen-dollar exchange rate, reject the rational expectations hypothesis and suggest that there exists a time-varying risk premium.

Although electricity market price behavior generally has been well studied in the last decade, the literature is sparse when discussing the importance of generator ramping costs to price volatility. This paper contributes to the literature by first formalizing the intuitive link between ramping costs and price volatility in a multi-period competitive equilibrium. The fundamental result of the model shows how price volatility rises with ramping costs. This notion is tested empirically using a pooled event study regression, a two-stage least squares (2SLS) specification, and a generalized autoregressive conditional heteroskedasticity (GARCH) model. The econometric results all confirm that price volatility is significantly decreased by additional natural gas capacity, which has comparatively low ramping costs. This marks the first rigorous study to quantify the pecuniary externalities within the New England market's generating profile, showing over a million dollars worth of price stability provided per year by each new natural gas generator. A simulation also explores how this value changes over time, noting that value of price stability from natural gas generators will increase with the proportion of non-dispatchable renewable generators.

Carry-trade strategies which consist of buying forward high-yield currencies tend to yield positive excess returns when global financial markets are booming, whereas they generate losses during crises. Firstly, we show that the sovereign default risk, which is taken on by investing in high-yield currencies, may increase the magnitude of the gains during the boom periods and the losses during crises. We empirically test for this hypothesis on a sample of 18 emerging currencies over the period from June 2005 to September 2010, the default risk being proxied by the sovereign credit default swap spread. Relying on smooth transition regression (STR) models, we show that default risk contributes to the carry-trade gains during booms, and worsens the losses during busts. Secondly, we turn to the “Fama regression” linking the exchange-rate depreciation to the interest-rate differential. We propose a nonlinear estimation of this equation, explaining the puzzling evolution of its coefficient by the change in the market volatility along the financial cycle. Then, we introduce the default risk into this equation and show that the “forward bias”, usually evidenced by a coefficient smaller than unity in this regression, is somewhat alleviated, as the default risk is significant to explain the exchange-rate change.

We analyze the returns to targeting the Australian, New Zealand, and South African currencies, through Japanese yen-funded speculation - with a particular focus on the South African rand, for which the carry trade is often seen as a source of exchange rate volatility. Targeting the rand through forward currency speculation produces returns which are as volatile, but with higher mean, and smaller probability of rare but large losses, than a buy-and-hold investment in the stock market - which is stochastically dominated in the second-order sense by the rand-targeting trade; and generates a larger return-to-volatility ratio than the Australian and New Zealand dollars - the two most common carry targets. Speculative positions and debt ‡ows driven by the carry trade cause an exchange rate process characterized by gradual appreciations punctuated by infrequent but potentially large and rapid depreciations. The consequent level of currency instability is a¤ected by whether in‡ows cause overheating, and how the central bank responds to the associated in‡ationary pressure

We study the empirical determinants of China's capital flight. In addition to the covered interest differential, our empirical exercise includes a rather exhaustive list of macroeconomic variables and a few institutional factors. Overall, our regression exercise shows that China's capital flight is quite well explained by its own history and covered interest differentials. The other possible determinants offer relatively small additional explanatory power. It is also found that China's capital flight responds differently to the components of covered interest differentials and to the positive and negative components of these variables. The response pattern, however, depends on the choice of data frequency. The general impression is that the monthly results are more intuitive than the quarterly ones.

In this paper we re-consider the effects of monetary policy shocks on exchange rates and forward premia. In the recent empirical literature, these effects have been predominantly described as puzzling, in that they would include delayed overshooting of the exchange rate as well as persistent deviations from uncovered interest parity. We specify an empirical model that in particular (i) allows for simultaneous multi-country adjustments in response to monetary policy shocks, and (ii) takes advantage of the identifying restrictions for monetary policy shocks implied by empirically supported long-run relations between the macroeconomic variables under consideration. Using monthly data from 1978 to 2006 for a panel of nine industrial economies (Australia, Canada, France, Germany, Italy, Japan, New Zealand, United Kingdom, and the United States), we find that U.S. Dollar effective and bilateral real exchange rates appreciate on impact after a contractionary U.S. monetary policy shock, and that there is no delay in the overshooting of the U.S. Dollar. Furthermore, there is no persistent significant forward premium. These results are consistent with the real exchange rate effects of monetary policy shocks in sticky price macroeconomic models, though the results of this paper also suggest that the latter models should be specified so as to capture simultaneous multi-country adjustments to shocks.

Verdelhan (2009) shows that if one is to explain the foreign exchange forward premium behavior using Campbell and Cochrane (1999)’s habit formation model one must specify it in such a way to generate pro-cyclical short term risk free rates. At the calibration procedure, we show that this is only possible in Campbell and Cochrane’s framework under implausible parameters specifications given that the price-consumption ratio diverges in almost all parameters sets. We, then, adopt Verdelhan’s shortcut of fixing the sensivity function λ(st) at its steady state level to attain a finite value for the price-consumption ratio and release it in the simulation stage to ensure pro-cyclical risk free rates. Beyond the potential inconsistencies that such procedure may generate, as suggested by Wachter (2006), with procyclical risk free rates the model generates a downward sloped real yield curve, which is at odds with the data.

We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium

We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium Publicado

In this study we examine if the spot and forward interest rates of the Canadian Treasury bill market are cointegrated and test the bill market efficiency. The data used are monthly average yields of three- and six-month Treasury bills from July 1962 to February 1996. Both spot and forward rates are found to be I(0) and cointegrated in the Engle-Granger (1987) sense. Tests based on Hansen=s (1982) GMM method support the bill market efficiency hypothesis.