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The forward rate premium puzzle: a case of misspecification? 1)

The forward rate premium puzzle: a case of misspecification? 1) Abstract Empirical studies often report a negative relationship between the difference in the spot exchange rate and the forward premium, violating the forward-rate unbiasedness hypothesis. Using standard regression on a sample of ten exchange rates, we obtain both positive and negative coefficients. We argue that the negative coefficients could arise as a result of the non-linearities in the relationship and misspecification. As an alternative to the standard regression, we use a time-varying-coefficient technique that estimates bias-free coefficients and, thus, should provide better estimates of the link between spot and forward rates. Our findings strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

The forward rate premium puzzle: a case of misspecification? 1)

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Publisher
de Gruyter
Copyright
Copyright © 2013 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2013-0009
Publisher site
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Abstract

Abstract Empirical studies often report a negative relationship between the difference in the spot exchange rate and the forward premium, violating the forward-rate unbiasedness hypothesis. Using standard regression on a sample of ten exchange rates, we obtain both positive and negative coefficients. We argue that the negative coefficients could arise as a result of the non-linearities in the relationship and misspecification. As an alternative to the standard regression, we use a time-varying-coefficient technique that estimates bias-free coefficients and, thus, should provide better estimates of the link between spot and forward rates. Our findings strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant.

Journal

Studies in Nonlinear Dynamics & Econometrics – de Gruyter

Published: May 1, 2013

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    Chin
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    Greene
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    MacDonald
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    Hodrick
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    Froot
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    Maynard
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    Swamy
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    Yogo
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    Pratt
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    Hausman
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    Baillie
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    Pratt
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    Bilson
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    Baillie
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    Engel
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    Granger
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    Swamy
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    Lewis
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    Frankel
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    Sakoulis
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    Froot
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    Granger
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    Chang