Possible solutions to the forward bias paradox

Baillie Richard T.

Journal of International Financial Markets, Institutions and Money, 2011, vol. 21, issue 4, 617-622

Abstract: This note outlines the economic theory behind the theory of uncovered interest parity and some of the econometric issues involved in testing and interpretation. I illustrate some of the issues involved by estimating a rolling regression of the forward premium regression from 22 years of eight major currencies. I also conclude that Pippenger's model is not consistent with the theory of UIP and that furthermore there are severe econometric problems in estimating his model. The forward premium anomaly remains a paradox in international finance that is important and worthwhile to understand more fully.

Keywords: Forward; premium; anomaly (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:21:y:2011:i:4:p:617-622

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