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Some Empirical Observations on the Forward Exchange Rate Anomaly

Derek Bond (), Michael J Harrison, Niall Hession () and Edward J. O’Brien
Additional contact information
Michael J Harrison: Trinity College Dublin
Edward J. O’Brien: Central Bank and Financial Services Authority of Ireland

Authors registered in the RePEc Author Service: Edward J. O'Brien

No 3/RT/06, Research Technical Papers from Central Bank of Ireland

Abstract: This paper looks at issues surrounding the testing of fractional integration and nonlinearity in relation to the forward exchange rate anomaly of Fama (1984). Recent tests for fractional integration and nonlinearity are discussed and used to investigate the behaviour of three exchange rates and premiums. The findings provide some support for I(1) exchange rates but suggest fractionality for premiums, mixed evidence on cointegration, and a strong possibility of time-wise nonlinearity. Significantly, when the nonlinearity is modelled using a random field regression, the forward anomaly disappears.

JEL-codes: C22 F31 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2006-04
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https://centralbank.ie/docs/default-source/publica ... 'brien).pdf?sfvrsn=4 (application/pdf)

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