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Do Foreign Excess Return Regressions Convey Valid Information?

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Author Info

  • 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.

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File URL: ftp://163.239.165.41/RePEc/sgo/wpaper/MSM_RIME_2011-09.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Research Institute for Market Economy, Sogang University in its series Working Papers with number 1109.

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Length: 13 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:sgo:wpaper:1109

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Keywords: near-unit discount factor; unit root fundamentals; contemporaneous correlation; present value model.;

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