Econometric analysis of present value models when the discount factor is near one

Kenneth West ()

Journal of Econometrics, 2012, vol. 171, issue 1, 86-97

Abstract: This paper develops asymptotic econometric theory to help understand data generated by a present value model with a discount factor near one. A leading application is to exchange rate models. A key assumption of the asymptotic theory is that the discount factor approaches one as the sample size grows. The finite sample approximation implied by the asymptotic theory is quantitatively congruent with the modest departures from random walk behavior that are typically found and with imprecise estimation of a well-studied regression relating spot and forward exchange rates.

Keywords: Uncovered interest parity; Asset price; Exchange rate; Forward rate; Forward premium anomaly; Expected return; Random walk; Efficient markets; Martingale model (search for similar items in EconPapers)
JEL-codes: C58 F31 F37 G12 G15 G17 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Econometric Analysis of Present Value Models When the Discount Factor Is near One (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:171:y:2012:i:1:p:86-97

DOI: 10.1016/j.jeconom.2012.07.002

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