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Do Foreign Excess Return Regressions Convey Valid Information?

Author

Listed:
  • Seongman Moon

    (Universidad Carlos III de Madrid)

  • Carlos Velasco

    (Universidad Carlos III de Madrid)

Abstract

This paper shows that the estimates in the spot return regression in the foreign exchange markets may not convey valid information if exchange rates are generated from the present value model with the near unit discount factor and unit root fundamentals. The main reason is that the present value model generates a large magnitude of a bias in the estimation of the regression accompanied by a wide distribution of the estimates. On the other hand, the implications of the present value model for the volatility and persistence of the spot return and the forward premium are consistent with the data.

Suggested Citation

  • Seongman Moon & Carlos Velasco, 2011. "Do Foreign Excess Return Regressions Convey Valid Information?," Working Papers 1109, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    • Handle: RePEc:sgo:wpaper:1109
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    File URL: https://tinyurl.com/ymn3rjv4
    File Function: First version, 2011
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    More about this item

    Keywords

    near-unit discount factor; unit root fundamentals; contemporaneous correlation; present value model.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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