FORECASTING FORWARD EXCHANGE RATE RISK PREMIUM IN SINGAPORE DOLLAR/US DOLLAR EXCHANGE RATE MARKET

• Published in: Singapore economic review Vol. 54; no. 2; pp. 283 - 298
• Main Author: KIANI, KHURSHID M.
• Format: Journal Article
• Language: English
• Published: Singapore World Scientific Publishing Company 01.06.2009; World Scientific Publishing Co. Pte. Ltd; World Scientific Publishing Co. Pte., Ltd
• Series: The Singapore Economic Review (SER)
• Subjects: American dollar; Dollar; Economic forecasts; Economic theory; Exchange market; Exchange rates; Forecasting; Foreign exchange markets; Foreign exchange rates; Forward exchange; Forward foreign exchange rates; International finance; Noise; non-normality; Normal distribution; risk premium; Risk premiums; signal extraction; Singapore; spot foreign exchange rates; Studies; Volatility; volatility persistence; Singapore; USA; Forward foreign exchange rates; non-normality; risk premium; spot foreign exchange rates; volatility persistence; signal extraction
• ISSN: 0217-5908; 1793-6837; 1793-6837
• DOI: 10.1142/S0217590809003288

In this research, monthly forward exchange rates are evaluated for possible existence of time varying risk premia in Singapore forward foreign exchange rates against US dollar. The time varying risk premia in Singapore dollar is modeled using non-Gaussian signal plus noise models that encompass non-normality and time varying volatility. The results from signal plus noise models show statistically significant evidence of time varying risk premium in Singapore forward exchange rates although we failed to reject the hypotheses of no risk premium in the series. The results from Gaussian versions of these models are not much different and are in line with Wolff (1987) who also used the same methodology in Gaussian settings. Our results show statistically significant evidence of volatility clustering in Singapore forward exchange rates. The results from Gaussian signal plus noise models also show statistically significant evidence of volatility clustering and non-normality in Singapore forward foreign exchange rates. Additional tests on the series show that exclusion of conditional heteroskedasticity from the signal plus noise models leads to false statistical inferences.