Can exchange rate volatility explain persistence in the forward premium?

Neil Kellard and Nicholas Sarantis

Journal of Empirical Finance, 2008, vol. 15, issue 4, pages 714-728

Abstract: The persistence of the forward premium has been cited both as evidence of the failure of the unbiasedness hypothesis and as rationale for the forward premium anomaly. This paper examines the recent proposition that forward premium persistence can be explained solely by the conditional variance of the spot rate. We provide theoretical and empirical evidence to challenge this proposition. Our empirical results are shown to be robust to the presence of structural breaks. A corollary of the results is that the [`]true' risk premium contains a long memory component. This is non-standard and has implications for the construction of rational expectations models of the foreign exchange market.

Date: 2008

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6VFG ... 626006dddc40d1cf040d
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:empfin:v:15:y:2008:i:4:p:714-728

Access Statistics for this article

Journal of Empirical Finance is edited by R. T. Baillie, G. Bekaert, W. Ferson, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Series data maintained by Heidi Boesdal ().