The Forward Rate Premium Puzzle: A Resolution?
AbstractEmpirical 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.
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 Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 11/23.
Date of creation: Mar 2011
Date of revision:
Contact details of provider:
Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Nagayasu, Jun, 2013.
"The Forward Premium Puzzle And The Euro,"
45746, University Library of Munich, Germany.
- Jun, Nagayasu, 2013. "The Forward Premium Puzzle and The Euro," SIRE Discussion Papers 2013-65, Scottish Institute for Research in Economics (SIRE).
- Jun Nagayasu, 2013. "The forward premium puzzle and the euro," Working Papers 1317, University of Strathclyde Business School, Department of Economics.
- Nagayasu, Jun, 2012. "The Forward Premium Puzzle And Risk Premiums," MPRA Paper 42472, University Library of Munich, Germany.
- 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.
- Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 1-20.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo).
If references are entirely missing, you can add them using this form.