In my previous post, I recounted “The New Fama Puzzle” as it applied to dollar exchange rates, with focus on the euro/dollar rate. A quick observation: the reversal also appears for non-US dollar based exchange rates (against euro, yen, pound).
The Fama regression is:
s+1 – s = α’ + β'(i-i*) + error
First, consider Fama regression coefficients (β’) for the one year horizon, up to 2007M08, against the US dollar, yen, euro, and pound.
Figure 1: Fama regression coefficients for various currency pairs, up to 2007M08. Source: BCFH (2018).
Now, consider the corresponding Fama regression coefficients, after 2007M09.
Figure 2: Fama regression coefficients for various currency pairs, after to 2007M09. Source: BCFH (2018).
It might not be clear from Figure 1, but almost all the estimates are negative. In Figure 2, they are almost all positive.
Here’s the table that underpins the figures.
Table 1: Fama regression coefficients for various currency pairs, for various sample periods. Source: BCFH (2018) Appendix Table 1.