Abstract
This paper explores whether knowledge of the time-series properties of the premium in the pricing of forward foreign exchange can be usefully exploited in forecasting future spot exchange rates. Signal-extraction techniques, based on recursive application of the Kalman filter, are used to measure the premium. Predictions using premium models compare favourably with those obtained from the use of the forward rate as a predictor of the future spot rate. The results also provide an interesting description of the time-series properties of the premium
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