Original Research

The relationship between the forward and realised spot exchange rate in South Africa

Chris van Heerden, André Heymans
Journal of Economic and Financial Sciences | Vol 5, No 1 | a312 | DOI: https://doi.org/10.4102/jef.v5i1.312 | © 2018 Chris van Heerden, André Heymans | This work is licensed under CC Attribution 4.0
Submitted: 28 June 2018 | Published: 30 April 2012

About the author(s)

Chris van Heerden, School of Economics, North West University, South Africa
André Heymans, School of Economics, North West University, South Africa

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Abstract

It is well known that the forward exchange rate and the realised future spot exchange rate differ. This phenomenon is better known as the exchange rate puzzle. Two approaches were followed to ascertain whether this difference is due to the weak explanatory ability of current economic fundamentals or whether the use of an ineffective econometric approach to model exchange rate theories is to blame. The first approach makes use of stationary economic time series data to model the ZAR/USD realised future spot exchange rate, while the second uses non-stationary level economic data to model the ZAR/USD realised future spot exchange rate. While the first approach reported weak results, the second approach illustrated that economic fundamentals are able to explain the ZAR/USD realised future spot exchange rate. These results also confirm that the exchange rate puzzle is a pseudoproblem.

Keywords

economic fundamentals; exchange rate puzzle; forward exchange rate; fractionally differenced data; non-stationary data; realised future spot exchange rate; stationary data

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