Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
958707 | Journal of Empirical Finance | 2008 | 15 Pages |
Abstract
The persistence of the forward premium has been cited both as evidence of the failure of the unbiasedness hypothesis and as rationale for the forward premium anomaly. This paper examines the recent proposition that forward premium persistence can be explained solely by the conditional variance of the spot rate. We provide theoretical and empirical evidence to challenge this proposition. Our empirical results are shown to be robust to the presence of structural breaks. A corollary of the results is that the ‘true’ risk premium contains a long memory component. This is non-standard and has implications for the construction of rational expectations models of the foreign exchange market.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Neil Kellard, Nicholas Sarantis,