Structural change in the forward discount: a Bayesian analysis of forward rate unbiasedness hypothesis

Yi-Chi Chen () and Wei-Choun Yu ()
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Yi-Chi Chen: National Cheng Kung University

Economics Bulletin, 2011, vol. 31, issue 2, 1807-1826

Abstract: Using Bayesian methods, we reexamine the empirical evidence from Sakoulis et al. (2010) regarding structural breaks in the forward discount for G-7 countries. Our Bayesian framework allows the number and pattern of structural changes in level and variance to be endogenously determined. We find different locations of breakpoints for each currency; mostly, fewer breaks are present. We find little evidence of moving toward stationarity in the forward discount after accounting for structural change. Our findings suggest that the existence of structural change is not a viable justification for the forward discount anomaly.

Keywords: Bayesian method; structural change; forward discount anomaly; Gibbs-sampling (search for similar items in EconPapers)
JEL-codes: C1 F3 (search for similar items in EconPapers)
Date: 2011-06-19
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