Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables
AbstractThis paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing for the unbiased forward exchange rate (UFER) hypothesis. Using US/UK data, it is shown that the UFER hypothesis cannot be rejected provided that instrumental variables are used to account for within-regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 03-15.
Length: 18 pages
Date of creation: Feb 2003
Date of revision:
Contact details of provider:
Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK
Other versions of this item:
- Martin Sola & Zacharias Psaradakis & Fabio Spagnolo, 2005. "Testing the unbiased forward exchange rate hypothesis using a Markov switching model and instrumental variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 423-437.
- fabio spagnolod & Zacharias Psaradakis & Martin Sola, 2003. "Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables," Public Policy Discussion Papers 03-15, Economics and Finance Section, School of Social Sciences, Brunel University.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mankiw, N Gregory & Miron, Jeffrey A, 1986.
"The Changing Behavior of the Term Structure of Interest Rates,"
The Quarterly Journal of Economics,
MIT Press, vol. 101(2), pages 211-28, May.
- N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
- Psaradakis, Zacharias & Sola, Martin, 1998. "Finite-sample properties of the maximum likelihood estimator in autoregressive models with Markov switching," Journal of Econometrics, Elsevier, vol. 86(2), pages 369-386, June.
- 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.
- Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
- Bruce E. Hansen, 1995.
"Erratum: The Likelihood ratio Test Under Nonstandard Conditions: Testing the Markov Switching Model of GNP,"
Boston College Working Papers in Economics
296., Boston College Department of Economics.
- Hansen, Bruce E, 1996. "Erratum: The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 195-98, March-Apr.
- Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
- Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-68, March-Apr.
- Brian Lucey & Grace Loring, . "Forward Exchange Rate Biasedness across Developed and Developing Country Currencies - Do Observed Patterns Persist Out of Sample?Abstract:," The Institute for International Integration Studies Discussion Paper Series iiisdp404, IIIS.
- Jinho Bae & Chang-Jin Kim & Dong Kim, 2012.
"The evolution of the monetary policy regimes in the U.S,"
Springer, vol. 43(2), pages 617-649, October.
- Jinho Bae & Chang-Jin Kim & Dong Heon Kim, 2011. "The Evolution of the Monetary Policy Regimes in the U.S," Discussion Paper Series 1102, Institute of Economic Research, Korea University.
- Zhiguang Wang & Prasad Bidarkota, 2012. "Risk premia in forward foreign exchange rates: a comparison of signal extraction and regression methods," Empirical Economics, Springer, vol. 42(1), pages 21-51, February.
- repec:hal:journl:halshs-00658540 is not listed on IDEAS
- Mathieu Gatumel & Florian Ielpo, 2011. "The Number of Regimes Across Asset Returns: Identification and Economic Value," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00658540, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John.Hunter).
If references are entirely missing, you can add them using this form.