The threshold nonstationary panel data approach to forward premiums

Jun Nagayasu

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the stationarity of forward premiums in the foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we confirmed mixed evidence of stationary forward premiums. However, mounting evidence to support the stationarity is provided when regime shifts which likely reflect the effects of the Lehman Shock and changing monetary policies are considered. Thus these events seem to have increased the nonstationary element in the premiums, and our further analysis suggests the effect of these events can be captured by interest rates, leaving the covered interest parity condition as a valid long-run concept.

Keywords: Panel unit root tests; structural shifts; forward premiums; Lehman shock (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2011-09-01
New Economics Papers: this item is included in nep-cis and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34265

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