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Can structural changes in the persistence of the forward premium explain the forward premium anomaly?

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  • Cho, Dooyeon
  • Chun, Sungju

Abstract

This paper investigates possible structural changes in the persistence of the forward premium by applying the multiple structural break methodology recently proposed by Kejriwal et al. (2013). The results reveal three or four breaks over the last three decades and provide evidence of long memory within each sub regime. The estimated break dates for the persistence appear to correspond to major economic events caused by macroeconomic shocks or changes in monetary policy. We provide some implications for the forward premium anomaly: if the forward premium is strictly stationary and has long memory, in which the confidence interval includes only the stationary region, the anomaly appears to be resolved or uncovered interest rate parity tends to hold. This finding suggests that the degree of the persistence of the forward premium plays an important role in explaining the anomaly.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:intfin:v:58:y:2019:i:c:p:225-235
    DOI: 10.1016/j.intfin.2018.11.003
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    References listed on IDEAS

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    Cited by:

    1. Kumar, Satish, 2019. "Does risk premium help uncover the uncovered interest parity failure?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).

    More about this item

    Keywords

    Forward premium; Persistence; Structural change; Hybrid testing procedure;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • 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

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