IDEAS home Printed from https://ideas.repec.org/p/ucn/wpaper/200801.html
   My bibliography  Save this paper

Nonlinearity as an explanation of the forward exchange rate anomaly

Author

Listed:
  • D. (Derek) Bond
  • Niall Hession
  • Michael J. Harrison
  • Edward J. (Edward Joseph) O'Brien

Abstract

This paper shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984). Using sterling-Canadian dollar data, and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision: the anomaly disappears.

Suggested Citation

  • D. (Derek) Bond & Niall Hession & Michael J. Harrison & Edward J. (Edward Joseph) O'Brien, 2008. "Nonlinearity as an explanation of the forward exchange rate anomaly," Working Papers 200801, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:wpaper:200801
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10197/1272
    File Function: First version, 2008
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bond Derek & Harrison Michael J. & O'Brien Edward J., 2005. "Investigating Nonlinearity: A Note on the Estimation of Hamilton's Random Field Regression Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, pages 1-43.
    2. Alex Maynard, 2006. "The forward premium anomaly: statistical artefact or economic puzzle? New evidence from robust tests," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1244-1281, November.
    3. 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 715-734, Nov.-Dec..
    4. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, pages 123-192.
    5. Patrick Paul Walsh & Franco Mariuzzo, 2005. "Embedding Consumer Taste for Location into a Structural Model of Equilibrium," Trinity Economics Papers 200053, Trinity College Dublin, Department of Economics.
    6. Crowder, William J., 1995. "Covered interest parity and international capital market efficiency," International Review of Economics & Finance, Elsevier, vol. 4(2), pages 115-132.
    7. Patrick Paul Walsh & Franco Mariuzzo, 2005. "Embedding Consumer Taste for Location into a Structural Model of Equilibrium," Trinity Economics Papers tep3, Trinity College Dublin, Department of Economics.
    8. Alex Maynard & Peter C. B. Phillips, 2001. "Rethinking an old empirical puzzle: econometric evidence on the forward discount anomaly," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 671-708.
    9. Gil-Alana, Luis A., 2002. "Empirical evidence of the spot and the forward exchange rates in Canada," Economics Letters, Elsevier, vol. 77(3), pages 405-409, November.
    10. 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.
    11. Hamilton, James D, 2001. "A Parametric Approach to Flexible Nonlinear Inference," Econometrica, Econometric Society, vol. 69(3), pages 537-573, May.
    12. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, pages 123-192.
    13. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, pages 319-338.
    14. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, pages 689-713.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Forward exchange rate anomaly; Nonlinearity; Random field regression; Foreign exchange; Nonlinear theories; Random fields;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucn:wpaper:200801. 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: (Nicolas Clifton). General contact details of provider: http://edirc.repec.org/data/educdie.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.