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Analysing the forward premium anomaly using a Logistic Smooth Transition Regression model

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  • Sofiane Amri

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    (CEDERS)

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    Abstract

    Several researchers have suggested that exchange rates may be characterized by nonlinear behaviour. This paper examines these nonlinearities and asymetries and estimates a Logistic Transition Regression (LSTR) of Fama Regression with the Risk Adjusted Forward Premia as transition variable. Results confirm the existence of nonlinear dynamics in the relationship between spot exchange rate differential and the forward premium for all the currencies of the sample and for all maturities (three and six-month maturities). Results confirm the insight into the presence of speculation barriers and transaction costs in the foreign exchange rate market that would explain, at least partially, the forward premium anomaly.

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    File URL: http://www.accessecon.com/pubs/EB/2008/Volume6/EB-08F30042A.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 6 (2008)
    Issue (Month): 26 ()
    Pages: 1-18

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    Handle: RePEc:ebl:ecbull:eb-08f30042

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    Keywords: smooth transition;

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    1. Giorgio Valente & Mark Taylor & Lucio Sarno & Richard Clarida, 2004. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," Working Papers wp04-13, Warwick Business School, Finance Group.
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    4. Richard T. Baillie & Rehim Kilic, 2005. "Do Asymmetric and Nonlinear Adjustments Explain the Forward Premium Anomaly?," Working Papers 543, Queen Mary, University of London, School of Economics and Finance.
    5. Leon, Hyginus & Sarno, Lucio & Valente, Giorgio, 2006. "Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle," CEPR Discussion Papers 5527, C.E.P.R. Discussion Papers.
    6. Bansal, Ravi & Dahlquist, Magnus, 1999. "The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies," CEPR Discussion Papers 2169, C.E.P.R. Discussion Papers.
    7. Giorgio Valente & H. L. Leon & Lucio Sarno, 2006. "Nonlinearity in Deviations From Uncovered Interest Parity," IMF Working Papers 06/136, International Monetary Fund.
    8. Baillie, R.T. & Bollerslev, T., 1993. "The Long Memory of the Foreward Premium," Papers 9203, Michigan State - Econometrics and Economic Theory.
    9. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
    10. Yangru Wu & Hua Zhang, 1996. "Asymmetry in forward exchange rate bias: A puzzling result," Economics Letters, Elsevier, vol. 50(3), pages 407-411, March.
    11. Kaminsky, Graciela, 1993. "Is There a Peso Problem? Evidence from the Dollar/Pound Exchange Rate, 1976-1987," American Economic Review, American Economic Association, vol. 83(3), pages 450-72, June.
    12. Scott Barnhart & Robert McNown & Myles Wallace, 2002. "Some answers to puzzles in testing unbiasedness in the foreign exchange market," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 687-696.
    13. Skalin, Joakim, 1998. "Testing linearity against smooth transition autoregression using a parametric bootstrap," Working Paper Series in Economics and Finance 276, Stockholm School of Economics, revised 13 Dec 1998.
    14. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
    15. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
    16. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
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    Cited by:
    1. Li, Dandan & Ghoshray, Atanu & Morley, Bruce, 2013. "An empirical study of nonlinear adjustment in the UIP model using a smooth transition regression model," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 109-120.

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