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Some Empirical Observations on the Forward Exchange Rate Anomaly

Listed author(s):
  • Bond, Derek

    (University of Ulster)

  • Harrison, Michael J

    (Trinity College Dublin)

  • Hession, Niall

    (University of Ulster)

  • O’Brien, Edward J.

    (Central Bank and Financial Services Authority of Ireland)

This paper looks at issues surrounding the testing of fractional integration and nonlinearity in relation to the forward exchange rate anomaly of Fama (1984). Recent tests for fractional integration and nonlinearity are discussed and used to investigate the behaviour of three exchange rates and premiums. The findings provide some support for I(1) exchange rates but suggest fractionality for premiums, mixed evidence on cointegration, and a strong possibility of time-wise nonlinearity. Significantly, when the nonlinearity is modelled using a random field regression, the forward anomaly disappears.

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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 3/RT/06.

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Length: 28 pages
Date of creation: Apr 2006
Handle: RePEc:cbi:wpaper:3/rt/06
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