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Nonlinearity as an explanation of the forward exchange rate anomaly

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  • Derek Bond
  • Michael Harrison
  • Niall Hession
  • Edward O'Brien

Abstract

This article shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984). Using sterling-Canadian dollar data and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 17 (2010)
Issue (Month): 13 ()
Pages: 1237-1239

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Handle: RePEc:taf:apeclt:v:17:y:2010:i:13:p:1237-1239

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  1. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
  2. Hai, Weike & Mark, Nelson C & Wu, Yangru, 1997. "Understanding Spot and Forward Exchange Rate Regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 715-34, Nov.-Dec..
  3. Gil-Alana, Luis A., 2002. "Empirical evidence of the spot and the forward exchange rates in Canada," Economics Letters, Elsevier, vol. 77(3), pages 405-409, November.
  4. D. Bond & M.J. Harrision & E.J. O, Brien, 2005. "Investigating Nonlinearity: A Note on the Estimation of Hamilton’s Random Field Regression Model," Trinity Economics Papers 200054, Trinity College Dublin, Department of Economics.
  5. Alex Maynard & Peter C. B. Phillips, 2001. "Rethinking an old empirical puzzle: econometric evidence on the forward discount anomaly," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 671-708.
  6. Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 471-488, August.
  7. Hamilton, James D, 2001. "A Parametric Approach to Flexible Nonlinear Inference," Econometrica, Econometric Society, vol. 69(3), pages 537-73, May.
  8. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  9. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
  10. Alex Maynard, 2006. "The forward premium anomaly: statistical artefact or economic puzzle? New evidence from robust tests," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1244-1281, November.
  11. Crowder, William J., 1995. "Covered interest parity and international capital market efficiency," International Review of Economics & Finance, Elsevier, vol. 4(2), pages 115-132.
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