Skip to main content

Research Repository

Advanced Search

The forward rate premium puzzle: a case of misspecification?

Hall, Stephen G.; Kenjegaliev, Amangeldi; Swamy, P. A. V. B.; Tavlas, George S.

Authors

Stephen G. Hall

P. A. V. B. Swamy

George S. Tavlas



Abstract

Empirical studies often report a negative relationship between the difference in the spot exchange rate and the forward premium, violating the forward-rate unbiasedness hypothesis. Using standard regression on a sample of ten exchange rates, we obtain both positive and negative coefficients. We argue that the negative coefficients could arise as a result of the non-linearities in the relationship and misspecification. As an alternative to the standard regression, we use a time-varying-coefficient technique that estimates bias-free coefficients and, thus, should provide better estimates of the link between spot and forward rates. Our findings strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant.

Citation

Hall, S. G., Kenjegaliev, A., Swamy, P. A. V. B., & Tavlas, G. S. (2013). The forward rate premium puzzle: a case of misspecification?. Studies in nonlinear dynamics and econometrics / sponsored by the MIT Press and the Society for Nonlinear Dynamics and Econometrics, 17(3), 265-279. doi:10.1515/snde-2013-0009

Journal Article Type Article
Acceptance Date Apr 1, 2013
Publication Date Jan 1, 2013
Publicly Available Date
Print ISSN 1081-1826
Electronic ISSN 1558-3708
Publisher De Gruyter
Peer Reviewed Peer Reviewed
Volume 17
Issue 3
Pages 265-279
DOI https://doi.org/10.1515/snde-2013-0009
Keywords Economics and Econometrics; Social Sciences (miscellaneous); Analysis
Public URL https://hull-repository.worktribe.com/output/429268