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Forward Foreign Exchange Rates, Expected Spot Rates, and Premia: A Signal-Extraction Approach

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Author Info
 Wolff, Christian C P
Abstract

The author implements a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal-extraction techniques from the engineering literature. Diagnostic tests indicate that these methods are successful in capturing the essence of the time-series properties of premia. The estimated premium models indicate that premia show a certain degree of persistance over time and that more than one-half of the variance in the forecast error that results from the use of current forward rates as predicators of future spot rates, is accounted for by variation in premium terms. Copyright 1987 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 42 (1987)
Issue (Month): 2 (June)
Pages: 395-406
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Handle: RePEc:bla:jfinan:v:42:y:1987:i:2:p:395-406

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  1. Ram Bhar & Carl Chiarella & Toan Pham, 2000. "Modeling the Currency Forward Risk Premium: Theory and Evidence," Research Paper Series 41, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  2. Zhongxia Jin, 2003. "The Dynamics of Real Interest Rates, Real Exchange Rates and the Balance of Payments in China: 1980-2002," IMF Working Papers 03/67, International Monetary Fund. [Downloadable!]
  3. Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2006. "The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests," The Institute for International Integration Studies Discussion Paper Series iiisdp123, IIIS. [Downloadable!]
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This page was last updated on 2008-11-26.

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