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Forward Premiums and Market Efficiency: Panel Unit-root Evidence from the Term Structure of Forward Premiums

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  • John T. Barkoulas

    ()
    (University of Tennessee)

  • Christopher F. Baum

    ()
    (Boston College
    DIW Berlin)

  • Atreya Chakraborty

    (University of Massachusetts-Boston)

Abstract

A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test--the Johansen likelihood ratio (JLR) test--to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 461.

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Length: 22 pages
Date of creation: 09 Jun 2000
Date of revision: 13 Jun 2001
Publication status: Published, Journal of Macroeconomics, 25(1), 109-122, 2003
Handle: RePEc:boc:bocoec:461

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Keywords: Forward premium; currency risk premium; panel unit-root tests; foreign exchange market efficiency;

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References

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Citations

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Cited by:
  1. Ahmet Can Ýnci, 2007. "Currency and yield Co-integration between a developed and an emerging Country: The Case of Turkey," Bogazici Journal of Economics and Administrative Sciences, Bogazici University, Department of Economics, vol. 21(1+2), pages 1-20.
  2. Lau, Evan & Baharumshah, Ahmad Zubaidi & Haw, Chan Tze, 2006. "Current account: mean-reverting or random walk behavior?," Japan and the World Economy, Elsevier, vol. 18(1), pages 90-107, January.
  3. Kleemann, Linda, 2014. "Knowing where organic markets move next: An analysis of developing countries in the pineapple market," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 8(14), pages 1-34.
  4. 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.
  5. Kühl, Michael, 2010. "Bivariate cointegration of major exchange rates, cross-market efficiency and the introduction of the Euro," Journal of Economics and Business, Elsevier, vol. 62(1), pages 1-19, January.
  6. Nagayasu, Jun, 2011. "The threshold nonstationary panel data approach to forward premiums," MPRA Paper 34265, University Library of Munich, Germany.
  7. Kühl, Michael, 2007. "Cointegration in the foreign exchange market and market efficiency since the introduction of the Euro: Evidence based on bivariate cointegration analyses," Center for European, Governance and Economic Development Research Discussion Papers 68, University of Goettingen, Department of Economics.
  8. 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.

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