The Forward Puzzle: Long-memory Bias,Short-term Expectations
The Unbiased Expectations Hypothesis (UEH) says that the forward premium is an unbiased predictor of the exchange rate change. In practice,UEH is always rejected: in the regression of the exchange rate change on the forward premium one gets a non-unity slope. Previous works variously ascribe the forward puzzle to model misspecification,non-stationary forward premium etc. However,no single theory fully succeeds in explaining the puzzle. One objective of this paper is to differentiate the model-misspecification problem from the non-stationary issue. The second objective is to test the competing theory that the slope is not constant across the forward premia. By Specifying the test model with a non-linear relationship between the exchange rate change and the forward premium we find that the models predictive power increases and the slope is closer to unity with extreme positive forward premia. To handle the non-stationary forward premium problem,we decompose the forward premium into a long-memory co-movement component and a short-term filtered forward premium. The forward puzzle becomes worse when the slope is related to the long-memory component but significantly weakened in terms of the filtered component,indicating an extreme support for UEH in Huisman et al. (1998). The standard deviations are calculated under the Monte Carlo Method for the overlapping observations.
forward puzzle uncovered interest parity tests Peso problem risk premium
Fang Liu Piet Sercu
KU Leuven,Naamsestraat 69,B- 3000 Leuven
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）