Big News in Small Samples

Peter Schotman, Stefan Straetmans and Casper G. de Vries ()
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Peter Schotman: University of Maastricht

No 97-083/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Univariate time series regressions of the forex return on the forward premium generate mostly negative slope coefficients. Simple and refined panel estimation techniques yield slope estimates that are much closer to unity. We explain the two apparently opposing results by allowing for both additive and multiplicative news. No arbitrage arguments imply that the multiplicative news component must be identical across all exchange rates at a given point in time. Cross section estimates reveal that the movements in the multiplicative news component are so large that a negative slope coefficient for the post Bretton Woods time series regressions is not improbable.

Date: 1997-08-21
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:uvatin:19970083

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