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Does the Forward Discount Represent a Long Memory Process or Short Memory Process with Multiple Changes in the Mean?

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  • Shahrin Aidil Rizal

    (Department of Finance and Banking, Faculty of Business & Accountancy, University of Malaya, 50603 Kuala Lumpur, Malaysia)

Abstract

This study aims to determine whether forward discount represents a long memory or short memory process with multiple changes in the mean. Based on the samples of six currencies from November 3, 1986, to March 6, 1998, using Baek and Pipiras’s (2012, 2014) statistical procedures, our findings suggest that forward discount is a short memory process with multiple changes in the mean rather than long memory. These changes in mean are the result of an intervention by monetary authorities in the forex market. Thus, earlier findings of long memory in forward discount, as reported in the extant literature, are questionable.

Suggested Citation

  • Shahrin Aidil Rizal, 2015. "Does the Forward Discount Represent a Long Memory Process or Short Memory Process with Multiple Changes in the Mean?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 235(6), pages 630-641, December.
    • Handle: RePEc:jns:jbstat:v:235:y:2015:i:6:p:630-641
    DOI: 10.1515/jbnst-2015-0607
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    References listed on IDEAS

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    1. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    2. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    3. Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 471-488, August.
    4. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(3), pages 315-352, June.
    5. Changryong Baek & Vladas Pipiras, 2012. "Statistical tests for a single change in mean against long‐range dependence," Journal of Time Series Analysis, Wiley Blackwell, vol. 33(1), pages 131-151, January.
    6. Baillie, Richard T & Bollerslev, Tim, 1994. "The long memory of the forward premium," Journal of International Money and Finance, Elsevier, vol. 13(5), pages 565-571, October.
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