Testing the Persistence of the Forward Premium: Structural Changes or Misspecification?

Tsung-Wu Ho () and Wan-Shin Mo ()

Open Economies Review, 2016, vol. 27, issue 1, 119-138

Abstract: This study investigates whether the ignored structural break causes the forward premium non-stationary. This paper proposes to test for the presence of unit root with multiple structural breaks. We find that, as long as the dynamic lag structure is specified, the forward premium exhibits a non-stationary process even if structural breaks are accounted for and points to no evidence of moving toward stationarity. Given our findings, the structural change model seems less robust in explaining the forward premium puzzle. Copyright Springer Science+Business Media New York 2016

Keywords: Forward premium puzzle; Unit roots with structural changes; Predictability; Forward rate unbiasedness hypothesis; Persistence; F31; E43; G10 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11079-015-9365-9

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