The Efficiency of the Polish Zloty Exchange Rate Market: The Uncovered Interest Parity and Fractal Analysis Approaches

The study of the effectiveness of the currency market is one of the most important research problems in the field of finance. The paper aims to assess the efficiency of the Polish zloty exchange rate market. We test the market efficiency by applying two independent approaches, one based on the Uncovered Interest Parity theory, and another based on the fractal analysis of exchange rates series. The research results show that the Uncovered Interest Parity holds only on the USD/PLN market. For EUR/PLN, JPY/PLN, CHF/PLN, MXN/PLN and TRY/PLN, the Uncovered Interest Parity hypothesis is rejected and implies the existence of the forward premium anomaly and market inefficiency. The estimated Hurst coefficient provides insight into the long-range dependence of exchange rates. The MXN/PLN, TRY/PLN and EUR/PLN exchange rates exhibit anti-persistent behaviours suggesting mean-reverting characteristics. For JPY/PLN and CHF/PLN, a high value of the Hurst exponent indicates long memory in the time series. Only for USD/PLN, we achieve the Hurst exponent closest to 0.5, which implies market efficiency. The research results obtained based on the UIP hypothesis and fractal analysis are consistent. The study reveals that the market efficiency hypothesis holds only for the most tradable Polish zloty currency pair, i.e., USD/PLN.

THE RISK PREMIUM IN THE FOREIGN EXCHANGE MARKET. THE APPLICATION OF ARCH-IN-MEAN MODEL

Forward premium anomaly is one of the most popular puzzles in the theory of international finance. The phenomenon is explained by, among others, the existence of non-zero risk premium in the foreign exchange market. The paper applies ARCH-in-mean models to assess whether there exists a time-varying risk premium in the USD/PLN and AUD/JPY foreign exchange markets. The results indicate the existence of a non-zero risk premium in the analyzed markets. As far as the USD/PLN is concerned, the risk premium takes negative values when the risk measured by conditional variance rises. The results suggest that when there is a surge in risk, the US dollar’s appreciation and Polish zloty depreciation increases. The results confirm the US dollar as a safe-haven currency that tends to appreciate during high-volatility and crisis periods. Moreover, the study shows that the risk premium in the AUD/JPY market takes positive values when the risk measured by conditional variance rises. It implies that when there is a mount in risk, the appreciation of Japanese yen increases. Furthermore, research results reveal the positive and significant relationship between stock market uncertainty and exchange rates conditional volatility.

An Empirical Examination of Risk Premiums in the Indian Currency Futures Market

In this paper, we examine whether risk premiums are significant in explaining the deviations from the uncovered interest rate parity (UIP) condition in an emerging Indian currency futures market. In particular, we explore the unbiasedness of futures quotes as a predictor of the future spot exchange rate to understand the forward premium anomaly condition. We report huge deviations from the UIP condition for all currencies considered and show that these deviations are explained by the risk premium. The realized risk premiums for all currencies are found to be negative and significantly different from zero, which suggests that investors are awarded for taking short positions in the foreign currency. The realized risk premiums in turn are found to be negatively related to the current spot rate returns and positively to the futures premium, conditional variance of spot rate returns, and the dividend yield.

New Evidence on the Forward Premium Puzzle

The forward premium anomaly (exchange rate changes are negatively related to interest rate differentials) is one of the most robust puzzles in financial economics. We recast the underlying parity relation in terms of lagged forward interest rate differentials, documenting a reversal of the anomalous sign on the coefficient in the traditional specification. We show that this novel evidence is consistent with recent empirical models of exchange rates that imply exchange rate changes depend on two key variables: the interest rate differential and the magnitude of the deviation of the current exchange rate from that implied by purchasing power parity.