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On the persistence of the forward premium in the joint presence of nonlinearity, asymmetry, and structural changes

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  • Cho, Dooyeon

Abstract

This paper investigates the degree of the persistence of the forward premium by simultaneously taking into account nonlinearity, asymmetry, and possible structural changes in the process. The analysis uses the multiple regime smooth transition autoregressive model, which is embedded within a nonlinear and asymmetric process, with time as the transition variable. In the model, parameters are allowed to change smoothly over time. The estimated structural change dates appear to be closely related to important economic events caused by macroeconomic shocks or changes in monetary policy. The results reveal that the persistence of the forward premium declines when nonlinearity, asymmetry, and structural changes are jointly allowed in the process. In addition, ignoring nonlinearity and asymmetry in the process tends to induce downward amplification in the persistence of the forward premium. This suggests that it is necessary to take into account all of the statistical properties of the forward premium when one measures persistence.

Suggested Citation

  • Cho, Dooyeon, 2018. "On the persistence of the forward premium in the joint presence of nonlinearity, asymmetry, and structural changes," Economic Modelling, Elsevier, vol. 70(C), pages 310-319.
  • Handle: RePEc:eee:ecmode:v:70:y:2018:i:c:p:310-319
    DOI: 10.1016/j.econmod.2017.11.013
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    References listed on IDEAS

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    Cited by:

    1. Cho, Dooyeon & Chun, Sungju, 2019. "Can structural changes in the persistence of the forward premium explain the forward premium anomaly?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 225-235.

    More about this item

    Keywords

    Nonlinearity; Asymmetry; Structural changes; Smoothly changing parameters; Forward premium;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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