The solution to the forward-bias puzzle: Reply
My proposed econometric solution to the forward-bias puzzle provoked several comments. Those comments raise three primary objections to my solution. (1) It suffers from multicollinearity, miss-specification and other serious econometric problems. (2) My key test equation is a tautology or identity. (3) My econometric solution has nothing to do with either the forward-bias puzzle or uncovered interest parity. This is my reply to those objections.
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Volume (Year): 21 (2011)
Issue (Month): 4 (October)
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References listed on IDEAS
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- Pippenger, John, 2011. "A Complete Solution To The Forward-Bias Puzzle," University of California at Santa Barbara, Economics Working Paper Series qt5gq9z4j0, Department of Economics, UC Santa Barbara.
- Fong, Wai-Ming & Valente, Giorgio & Fung, Joseph K.W., 2010. "Covered interest arbitrage profits: The role of liquidity and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1098-1107, May.
- Pippenger, John, 2011. "The solution to the forward-bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 296-304, April.
- Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008.
"Arbitrage in the foreign exchange market: Turning on the microscope,"
Journal of International Economics,
Elsevier, vol. 76(2), pages 237-253, December.
- Q. Farooq Akram, & Dagfinn Rime & Lucio Sarno, 2005. "Arbitrage in the foreign exchange market: Turning on the microscope," Working Paper 2005/12, Norges Bank.
- Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2006. "Arbitrage in the Foreign Exchange Market: Turning on the Microscope," SIFR Research Report Series 42, Institute for Financial Research.
- Akram, Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the Foreign Exchange Market: Turning on the Microscope," CEPR Discussion Papers 6878, C.E.P.R. Discussion Papers.
- Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2008. "Carry Trade: The Gains of Diversification," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 581-588, 04-05.
- Sanders S., Chang, 2011. "On the (in)feasibility of covered interest parity as a solution to the forward bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 611-616, October.
- Jessica James & Kristjan Kasikov & Aysu Secmen, 2009. "[image omitted] Uncovered interest parity and the FX carry trade," Quantitative Finance, Taylor & Francis Journals, vol. 9(2), pages 123-127.
- Richard T., Baillie, 2011. "Possible solutions to the forward bias paradox," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 617-622, October.
- Christian, Müller, 2011. "The forward-bias puzzle: Still unsolved," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 605-610, October.
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