On Biases in the Measurement of Foreign Exchange Risk Premiums
The hypothesis that the forward rate is an unbiased predictor of the future spot rate has been consistently rejected in recent empirical studies. This paper examines several sources of measurement error and misspecification that might induce biases in such studies. Although previous inferences are shown to be robust to a failure to construct true returns and to omitted variable bias arising from conditional heteroskedasticity in spot rates, we show that the parameters were not stable over the 1975-1989 sample period. Estimation that allows for endogenous regime shifts in the parameters demonstrates that deviations from unbiasedness were more severe in the 1980's.
|Date of creation:||Oct 1991|
|Publication status:||published as Journal of International Money and Finance, Vol.12, no.2 (April 1993): 115-138.|
|Note:||ITI AP IFM|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
- Hodrick, Robert J. & Srivastava, Sanjay, 1984.
"An investigation of risk and return in forward foreign exchange,"
Journal of International Money and Finance,
Elsevier, vol. 3(1), pages 5-29, April.
- Robert J. Hodrick & Sanjay Srivastava, 1983. "An Investigation of Risk and Return in Forward Foreign Exchange," NBER Working Papers 1180, National Bureau of Economic Research, Inc.
- Ruud, Paul A., 1991.
"Extensions of estimation methods using the EM algorithm,"
Journal of Econometrics,
Elsevier, vol. 49(3), pages 305-341, September.
- Paul A. Ruud., 1988. "Extensions of Estimation Methods Using the EM Algorithm.," Economics Working Papers 8899, University of California at Berkeley.
- Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August.
- Bilson, John F O, 1981. "The "Speculative Efficiency" Hypothesis," The Journal of Business, University of Chicago Press, vol. 54(3), pages 435-451, July.
- Sibert, Anne, 1989.
"The Risk Premium in the Foreign Exchange Market,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 21(1), pages 49-65, February.
- Anne C. Sibert, 1987. "The risk premium in the foreign exchange market," Research Working Paper 87-07, Federal Reserve Bank of Kansas City.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
- Frenkel, Jacob A. & Razin, Assaf, 1980. "Stochastic prices and tests of efficiency of foreign exchange markets," Economics Letters, Elsevier, vol. 6(2), pages 165-170.
- Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters,in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc.
- Hodrick, Robert J., 1989. "Risk, uncertainty, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 433-459, May.
- Engel, Charles, 1992. "On the foreign exchange risk premium in a general equilibrium model," Journal of International Economics, Elsevier, vol. 32(3-4), pages 305-319, May.
- Charles Engel, 1990. "On the foreign exchange risk premium in a general equilibrium model," Research Working Paper 90-06, Federal Reserve Bank of Kansas City.
- Ghysels, Eric & Hall, Alastair, 1990. "Are consumption-based intertemporal capital asset pricing models structural?," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 121-139.
- Korajczyk, Robert A. & Viallet, Claude J., 1992. "Equity risk premia and the pricing of foreign exchange risk," Journal of International Economics, Elsevier, vol. 33(3-4), pages 199-219, November.
- Cornell, Bradford, 1989. "The impact of data errors on measurement of the foreign exchange risk premium," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 147-157, March.
- Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
- Baillie, Richard T. & Bollerslev, Tim, 1990. "A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 309-324, September.
- Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-192, Summer.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Canova, Fabio & Marrinan, Jane, 1993. "Profits, risk, and uncertainty in foreign exchange markets," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 259-286, November.
- Gregory, Allan W. & McCurdy, Thomas H., 1984. "Testing the unbiasedness hypothesis in the forward foreign exchange market: A specification analysis," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 357-368, December.
- Bossaerts, Peter & Hillion, Pierre, 1991. "Market Microstructure Effects of Government Intervention in the Foreign Exchange Market," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 513-541.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3861. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.