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

Stephen Hall, Amangeldi Kenjegaliev (), Swamy P. A. V. B. and George Tavlas
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Swamy P. A. V. B.: Federal Reserve Board (retired): c/o, Bank of Greece, 21 E. Venizelos Avenue, GR 102 50 Athens

Studies in Nonlinear Dynamics & Econometrics, 2013, vol. 17, issue 3, 265-279

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.

Keywords: forward premium anomaly, time-varying-coefficient, spurious relationship, JEL classifications: C51; E43 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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DOI: 10.1515/snde-2013-0009

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