Covered interest rate parity assumes that there is no risk premium on the hedged returns on currencies. However, empirical evidence indicates that risk premiums are not identically zero, and this is referred to as the forward premium puzzle. We show that there exist market regimes, within which...

We consider the presence of regimes in currency markets and their implications for interest rate parity. A weak form of interest rate parity is postulated and tested which assumes that the hedged risk premiums are identical within each regime across currencies. Both the in-sample (January 2002 -...

This paper presents a dynamic model of optimal currency returns with a hidden Markov regime switching process. We postulate a weak form of interest rate parity that the hedged risk premiums on currency investments are identical within each regime across all currencies. Both the in-sample and the...

Purpose – This paper aims to extend the Fama and French (FF) three-factor model in studying time-varying risk premiums of Sector Select Exchange Traded Funds (ETFs) under a Markov regime-switching framework. Design/methodology/approach – First, the original FF model is augmented to include...