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The real miss-specification in the forward rate premium puzzle

Author

Listed:
  • Amit K. Sinha

    (Bradley University)

  • Philip A. Horvath

    (Bradley University)

  • Robert C. Scott

    (Bradley University)

Abstract

While a number of papers have attempted to explain the forward rate premium puzzle the issue nevertheless endures. Hall et al. (Stud Nonlinear Dyn E 17(3):265–279, 2013) argue that the standard regression approach is the cause for the empirical conundrum observed in the investigation of forward-spot relationship. In this paper we identify embedded variables to be the real cause for the miss-specification in the forward rate premium puzzle. Using the Fama (J Financ Econ 13:509–528, 1984) approach along with simulated independent and uniformly distributed data, we demonstrate the forward-spot approach to have spurious reliable forecast ability.

Suggested Citation

  • Amit K. Sinha & Philip A. Horvath & Robert C. Scott, 2017. "The real miss-specification in the forward rate premium puzzle," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(3), pages 463-473, July.
    • Handle: RePEc:spr:jecfin:v:41:y:2017:i:3:d:10.1007_s12197-016-9363-9
    DOI: 10.1007/s12197-016-9363-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Market efficiency; Bonds; Forward premium anomaly; Spurious relationship;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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