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Some Empirical Observations on the Forward Exchange Rate Anomaly

Derek Bond (), Michael J. Harrison (), Niall Hession () and Edward O'Brien
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Michael J. Harrison: Department of Economics, Trinity College

Economic Papers from Trinity College Dublin, Economics Department

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: 25 pages
Date: 2006-01
New Economics Papers: this item is included in nep-fmk and nep-ifn
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http://www.tcd.ie/Economics/TEP/2006_papers/TEP1.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep2006

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