Does the Forward Premium/Discount Help to Predict the Future Change in the Exchange Rate?

This paper reexamines the relationship between the spot exchange rate depreciation and the forward premium. Many researchers report a negative, and occasionally significant, coefficient when the spot depreciation is regressed on the forward premium. The authors' analysis reveals that such findings are due to the presence of structural breaks and/or outliers in the data. After allowing for these, the forward premium has no information at all about the future change in the spot exchange rate. This finding is a direct implication of the spot rate being, approximately, a random walk and the covered interest parity holding. Copyright 1992 by Scottish Economic Society.