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Econometric analysis of present value models when the discount factor is near one

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  • West, Kenneth D.

Abstract

This paper develops asymptotic econometric theory to help understand data generated by a present value model with a discount factor near one. A leading application is to exchange rate models. A key assumption of the asymptotic theory is that the discount factor approaches one as the sample size grows. The finite sample approximation implied by the asymptotic theory is quantitatively congruent with the modest departures from random walk behavior that are typically found and with imprecise estimation of a well-studied regression relating spot and forward exchange rates.

Suggested Citation

  • West, Kenneth D., 2012. "Econometric analysis of present value models when the discount factor is near one," Journal of Econometrics, Elsevier, vol. 171(1), pages 86-97.
    • Handle: RePEc:eee:econom:v:171:y:2012:i:1:p:86-97
    DOI: 10.1016/j.jeconom.2012.07.002
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    Cited by:

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    2. Engel, Charles & Kazakova, Katya & Wang, Mengqi & Xiang, Nan, 2022. "A reconsideration of the failure of uncovered interest parity for the U.S. dollar," Journal of International Economics, Elsevier, vol. 136(C).
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    More about this item

    Keywords

    Uncovered interest parity; Asset price; Exchange rate; Forward rate; Forward premium anomaly; Expected return; Random walk; Efficient markets; Martingale model;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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