HAS NONLINEARITY RESOLVED THE A NOMALY OF UNIT ROOT BEHAVIOUR IN FORWARD DISCOUNT ? NEW EMPIRICAL EVIDENCE

Aidil Rizal Shahrin ()
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Aidil Rizal Shahrin: Department of Finance & Banking, Faculty of Business & Accountancy, University of Malaya

Journal for Economic Forecasting, 2015, issue 1, 70-80

Abstract: In this study we analyse the issue of mean reversion in forward discount based on nonlinear framework for seven currencies. Compared to previous study, we apply a novel approach of a threshold regression (TAR) and followed by nonlinear unit root tests. This approach disentangles tbodhe issue of nonlinearity and nonstationarity in forward discount. After applying nonlinearity test, we found evidence of nonlinearities in five out of seven currencies for the forward discounts. Notably, it is found that forward discount behaves as unit root in a band and becomes mean reverting outside the band. This explains the mixed findings in earlier studies due to general assumption of linearity in forward discount.

Keywords: forward discount; threshold autoregression (TAR); forward bias puzzle; efficiency (search for similar items in EconPapers)
JEL-codes: C22 C53 F30 F31 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2015:i:1:p:70-80

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