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The solution to the forward-bias puzzle: Reply

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  • John, Pippenger
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    Abstract

    My proposed econometric solution to the forward-bias puzzle provoked several comments. Those comments raise three primary objections to my solution. (1) It suffers from multicollinearity, miss-specification and other serious econometric problems. (2) My key test equation is a tautology or identity. (3) My econometric solution has nothing to do with either the forward-bias puzzle or uncovered interest parity. This is my reply to those objections.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 21 (2011)
    Issue (Month): 4 (October)
    Pages: 629-636

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    Handle: RePEc:eee:intfin:v:21:y:2011:i:4:p:629-636

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    Web page: http://www.elsevier.com/locate/intfin

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    Keywords: Exchange rates Forward-bias puzzle Covered interest parity Uncovered interest parity Arbitrage;

    References

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    1. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    2. Fong, Wai-Ming & Valente, Giorgio & Fung, Joseph K.W., 2010. "Covered interest arbitrage profits: The role of liquidity and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1098-1107, May.
    3. Pippenger, John, 2011. "A Complete Solution To The Forward-Bias Puzzle," University of California at Santa Barbara, Economics Working Paper Series qt5gq9z4j0, Department of Economics, UC Santa Barbara.
    4. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2008. "Carry Trade: The Gains of Diversification," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(2-3), pages 581-588, 04-05.
    5. Sanders S., Chang, 2011. "On the (in)feasibility of covered interest parity as a solution to the forward bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(4), pages 611-616, October.
    6. Richard T., Baillie, 2011. "Possible solutions to the forward bias paradox," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(4), pages 617-622, October.
    7. Jessica James & Kristjan Kasikov & Aysu Secmen, 2009. "[image omitted] Uncovered interest parity and the FX carry trade," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(2), pages 123-127.
    8. Pippenger, John, 2011. "The solution to the forward-bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 21(2), pages 296-304, April.
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    Cited by:
    1. Dominique Torre, 2012. "The monetary views of Paul Einzig," Post-Print halshs-00726126, HAL.

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