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Estimation and Hypothesis Testing with Restricted Spectral Density Matrices: An Application to Uncovered Interest Parity

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  • Danny Quah
  • Takatoshi Ito

Abstract

This paper explores an econometric estimation technique for dynamic linear models. The method combines the analytics of moving average solutions to dynamic models together with computational advantages of the Whittle likelihood. A hypothesis of interest to international and financial economists is represented in the form of cross-equation restrictions and tested under the technique. This paper employs data on Japanese yen- and U.S. dollar-denominated interest rates and yen/dollar exchange rates to examine the hypothesis of uncovered interest parity under rational expectations.

Suggested Citation

  • Danny Quah & Takatoshi Ito, 1989. "Estimation and Hypothesis Testing with Restricted Spectral Density Matrices: An Application to Uncovered Interest Parity," NBER Technical Working Papers 0050, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberte:0050
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    Cited by:

    1. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.

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