A New Look at the Forward Premium Puzzle
Nikolay Gospodinov ()
Journal of Financial Econometrics, 2009, vol. 7, issue 3, 312-338
This paper analyzes the sampling properties of the widely documented large negative slope estimates in regressions of future exchange returns on current forward premium. We argue that the abnormal behavior of the slope estimators in these regressions arises from the simultaneous presence of high persistence, low signal-to-noise ratio, strong endogeneity, and an omitted variable problem. The paper develops the limiting theory for the slope parameter estimators in the levels and differenced forward premium regressions under some assumptions that match the empirical properties of the data. The asymptotic results derived in the paper help to reconcile the findings from the levels and difference specifications and provide important insights about the time-series properties of the implied risk premium. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
References: Add references at CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
Working Paper: A New Look at the Forward Premium Puzzle (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:7:y:2009:i:3:p:312-338
Ordering information: This journal article can be ordered from
Access Statistics for this article
Journal of Financial Econometrics is currently edited by RenÈ GarciaEditor-Name: Eric Renault
More articles in Journal of Financial Econometrics from Society for Financial Econometrics Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().