Term structure of forward exchange premiums: evidence from the 1920s

Following Clarida and Taylor, the term structure of forward exchange premiums can be interpreted as multiple cointegration vectors, if it is assumed that departures from the risk-neutral efficient markets hypothesis are stationary. This hypothesis is tested using spot rates and one-month and three-month forward rates for six European countries during the 1920s floating rate era. Beginning in late 1924, speculation about a return to gold may have resulted in a non-stationary forward premium. However, except for this speculative period, the term structure of forward premiums was stationary for three currencies. Thus the empirical results presented are broadly consistent with the analysis of Taylor and McMahon, MacDonald and Taylor and Miller and Sutherland.