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Has the Link Between the Spot and Forward Exchange Rates Broken Down? Evidence from Rolling Cointegration Tests

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  • Ali Kutan

    ()

  • Su Zhou

    ()

Abstract

Recent literature reported conflicting results about the cointegration relationship between the spot and forward exchange rates. Applying rolling cointegration tests to the mark, yen, and Swiss franc with respect to the U.S. dollar for the post-80 period, we find that the relationship between the two rates broke down in the late 1980s. Although they became cointegrated again during the mid-90s, they no longer co-moved proportionally. It is argued that failure to account for such significant structural changes in the data generating process explains, at least partially, the conflicting findings reported in the literature. Copyright Kluwer Academic Publishers 2003

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 14 (2003)
Issue (Month): 4 (October)
Pages: 369-379

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Handle: RePEc:kap:openec:v:14:y:2003:i:4:p:369-379

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: forward and spot rates; rolling cointegration tests; market efficiency; predictability; structural break;

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References

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Cited by:
  1. Villanueva, O. Miguel, 2007. "Spot-forward cointegration, structural breaks and FX market unbiasedness," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(1), pages 58-78, February.
  2. Tang, Chor Foon, 2007. "The stability of money demand function in Japan: Evidence from rolling cointegration approach," MPRA Paper 19807, University Library of Munich, Germany.
  3. Sofiane Sekioua, 2004. "The forward unbiasedness hypothesis and the forward premium: a nonlinear analysis," Money Macro and Finance (MMF) Research Group Conference 2003 85, Money Macro and Finance Research Group.
  4. Sekioua, Sofiane H., 2006. "Nonlinear adjustment in the forward premium: evidence from a threshold unit root test," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 164-183.
  5. Chor Foon Tang & Hooi Hooi Lean, 2011. "Revisit Feldstein-Horioka puzzle: evidence from Malaysia," Economics Bulletin, AccessEcon, vol. 31(3), pages 2237-2249.

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