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The Forward Rate Premium Puzzle: A Resolution?

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Author Info

  • Stephen Hall

    ()

  • P. A. V. B. Swamy

    ()

  • George S. Tavlas

    ()

  • Amangeldi Kenjegaliev

    ()

Abstract

Empirical studies report that there is a negative relationship between the spot difference and forward premium. This result violates the forward rate unbiasedness theory. Using standard regression we found that recent samples give mixed results with both positive and negative coefficients. One possibility is that the negative coefficients could arise due to the non-linearities in the series and misspecification. To overcome these problems we employed a relatively novel technique. As an alternative to the standard regression we used a time-varying coefficient technique. This methodology estimates bias-free coefficients and thus should provide better estimates of the link between spot and forward rates. The findings of the time-varying coefficient model strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant. At the same time our results do not violate the efficient market theory.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 11/23.

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Date of creation: Mar 2011
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Handle: RePEc:lec:leecon:11/23

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Related research

Keywords: Forward premium anomaly; Time-varying coefficients; spurious;

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Cited by:
  1. Nagayasu, Jun, 2013. "The Forward Premium Puzzle And The Euro," MPRA Paper 45746, University Library of Munich, Germany.
  2. Nagayasu, Jun, 2012. "The Forward Premium Puzzle And Risk Premiums," MPRA Paper 42472, University Library of Munich, Germany.
  3. Stephen Hall & Amangeldi Kenjegaliev & P.A.V.B. Swamy & George S. Tavlas, 2013. "Measuring Currency Pressures: The Cases of the Japanese Yen, the Chinese Yuan, and the U.K. Pound," Discussion Papers in Economics 13/10, Department of Economics, University of Leicester.

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