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Long maturity forward rates of major currencies are stationary

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  • Zsolt Darvas
  • Zoltán Schepp

    ()
    (University of Pécs)

Abstract

Using eight unit root tests and a stationarity test and three decades of monthly data for the currencies between the US, Germany, UK and Switzerland, we find that, while spot exchange rates are non-stationary, long maturity forward rates are stationary.

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File URL: http://web.uni-corvinus.hu/matkg/working_papers/wp_2006_3_darvas_schepp.pdf
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Bibliographic Info

Paper provided by Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest in its series Working Papers with number 0603.

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Length: 8 pages
Date of creation: 14 Feb 2006
Date of revision:
Handle: RePEc:mkg:wpaper:0603

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Keywords: forward exchange rate; unit root tests;

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References

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  1. Perron, P. & Ng, S., 1994. "Useful Modifications to Some Unit Root Tests with Dependent Errors and Their Local Asymptotic Properties," Cahiers de recherche 9427, Universite de Montreal, Departement de sciences economiques.
  2. Menzie D. Chinn & Guy Meredith, 2005. "Testing Uncovered Interest Parity at Short and Long Horizons during the Post-Bretton Woods Era," NBER Working Papers 11077, National Bureau of Economic Research, Inc.
  3. Clarida, Richard H. & Sarno, Lucio & Taylor, Mark P. & Valente, Giorgio, 2003. "The out-of-sample success of term structure models as exchange rate predictors: a step beyond," Journal of International Economics, Elsevier, vol. 60(1), pages 61-83, May.
  4. Jacob Boudoukh & Matthew Richardson & Robert Whitelaw, 2005. "The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly," NBER Working Papers 11840, National Bureau of Economic Research, Inc.
  5. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  6. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  7. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  8. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Zsolt Darvas & Gábor Rappai & Zoltán Schepp, 2007. "Uncovering Yield Parity: A New Insight into the UIP Puzzle through the Stationarity of Long Maturity Forward Rates," Money Macro and Finance (MMF) Research Group Conference 2006 84, Money Macro and Finance Research Group.
  2. Jean Pisani-Ferry & Zsolt Darvas, 2010. "The threat of 'currency wars': a European perspective," Policy Contributions 461, Bruegel.
  3. Zsolt Darvas, 2011. "Beyond the crisis: prospects for emerging Europe," Working Papers 466, Bruegel.
  4. Zsolt Darvas, 2010. "The case for reforming euro area entry criteria," Society and Economy, Akadémiai Kiadó, Hungary, vol. 32(2), pages 195-219, December.

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