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- Title
FX Liquidity Risk and Forward Premium Puzzle.
- Authors
ABANKWA, SAMUEL
- Abstract
I document the forward premium puzzle and show that the Uncovered Interest Rate Parity (UIP) violation is resolved in a low liquidity regime using a low-frequency time-varying FX liquidity risk measure. Controlling for FX liquidity risk, I show that the negative slope coefficients in Fama's 1984 UIP regressions become positive in low liquidity regimes. This implies that in a low liquidity regime, high interest rate currencies depreciate, thereby resolving or lessening the UIP violation. I also show that Japanese yen (JPY) exhibits a "liquidity hedge" against liquidity risk. This lends support to the global usage of JPY as lending currency for the carry trade strategy.
- Subjects
RISK premiums; JAPANESE yen; INTEREST rates; PUZZLES; MONEY
- Publication
Quarterly Journal of Finance & Accounting, 2020, Vol 58, Issue 1/2, p101
- ISSN
1939-8123
- Publication type
Article