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The threshold nonstationary panel data approach to forward premiums

  • Nagayasu, Jun

This paper analyzes the stationarity of forward premiums in the foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we confirmed mixed evidence of stationary forward premiums. However, mounting evidence to support the stationarity is provided when regime shifts which likely reflect the effects of the Lehman Shock and changing monetary policies are considered. Thus these events seem to have increased the nonstationary element in the premiums, and our further analysis suggests the effect of these events can be captured by interest rates, leaving the covered interest parity condition as a valid long-run concept.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34265.

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Date of creation: 01 Sep 2011
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Handle: RePEc:pra:mprapa:34265
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  1. 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.
  2. 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.
  3. Barkoulas, John & Baum, Christopher F. & Chakraborty, Atreya, 2003. "Forward premiums and market efficiency: Panel unit-root evidence from the term structure of forward premiums," Journal of Macroeconomics, Elsevier, vol. 25(1), pages 109-122, March.
  4. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
  5. Fukuta, Yuichi & Saito, Makoto, 2002. "Forward Discount Puzzle and Liquidity Effects: Some Evidence from Exchange Rates among the United States, Canada, and Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(4), pages 1014-33, November.
  6. Kyung-So Im & Junsoo Lee & Margie Tieslau, 2005. "Panel LM Unit-root Tests with Level Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 393-419, 06.
  7. Westerlund Joakim, 2006. "Testing for Error Correction in Panel Data," Research Memorandum 056, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. MacDonald, Ronald & Moore, Michael J., 2001. "The spot-forward relationship revisited: an ERM perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 29-52, March.
  9. Pippenger, John, 2011. "The solution to the forward-bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 296-304, April.
  10. Junsoo Lee & Mark C. Strazicich, 2013. "Minimum LM unit root test with one structural break," Economics Bulletin, AccessEcon, vol. 33(4), pages 2483-2492.
  11. Hai, Weike & Mark, Nelson C & Wu, Yangru, 1997. "Understanding Spot and Forward Exchange Rate Regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 715-34, Nov.-Dec..
  12. Sakoulis, Georgios & Zivot, Eric & Choi, Kyongwook, 2010. "Structural change in the forward discount: Implications for the forward rate unbiasedness hypothesis," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 957-966, December.
  13. Barnhart, Scott W. & McNown, Robert & Wallace, Myles S., 1999. "Non-Informative Tests of the Unbiased Forward Exchange Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(02), pages 265-291, June.
  14. Nagayasu, Jun, 2010. "The Common Component in the Forward Premium: Evidence from the Asia-Pacific Region," MPRA Paper 24549, University Library of Munich, Germany.
  15. Ho, Tsung-Wu, 2003. "A re-examination of the unbiasedness forward rate hypothesis using dynamic SUR model," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 542-559.
  16. Taylor, Mark P, 1987. "Covered Interest Parity: A High-Frequency, High-Quality Data Study," Economica, London School of Economics and Political Science, vol. 54(216), pages 429-38, November.
  17. Papell, David H & Theodoridis, Hristos, 2001. "The Choice of Numeraire Currency in Panel Tests of Purchasing Power Parity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 790-803, August.
  18. Jeon, Bang Nam & Seo, Byeongseon, 2003. "The impact of the Asian financial crisis on foreign exchange market efficiency: The case of East Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 509-525, September.
  19. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  20. Liu, Wei & Maynard, Alex, 2005. "Testing forward rate unbiasedness allowing for persistent regressors," Journal of Empirical Finance, Elsevier, vol. 12(5), pages 613-628, December.
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