Analysis of the EUR/USD Forward Exchange Premium

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Author	Nessrine Hamzaoui Aloui
ISSN	2307-2466
On Pages	521-530
Volume No.	2
Issue No.	7
Issue Date	December 01, 2020
Publishing Date	December 01, 2020
Keywords	Asymmetry, Forward premium puzzle, GJR-GARCH, Regime switching, Subprime crisis.

Abstract

In this paper, we adopt two different specifications of the ARCH / GARCH modeling, given its descriptive and predictive advantages, to analyze the EUR/USD forward exchange premium. In a first step, we estimate a symmetric linear model by taking into account the effect of the mean and the conditional variance in a univariate framework. In a second step, we proceed to estimate the AR (1) - GJR - GARCH and the AR (1) - GJR - GARCH -M models that fit into a linear, bivariate and asymmetric framework. The estimation results indicate that the shocks hitting the conditional variance are quite persistent over time and this can reveal the presence of regime switching in the process explaining the variance. In addition, they show the existence of an asymmetry in the dynamics of the conditional variance characterizing the three-month and the six-month forward premiums.

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