Discussion paper

DP15817 How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis

A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients in the intervals (0.23,0.45) and (0.95,1.16) for the currencies of developed and emerging countries respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method.


Zigraiova, D, T Havranek, Z Irsova and J Novak (2021), ‘DP15817 How Puzzling Is the Forward Premium Puzzle? A Meta-Analysis‘, CEPR Discussion Paper No. 15817. CEPR Press, Paris & London. https://cepr.org/publications/dp15817