Can exchange rate volatility explain persistence in the forward premium?

Journal of Empirical Finance

Volumn 15, Issue 4, 2008, Pages 714-728

  Kellard, Neil ^a   Sarantis, Nicholas ^b  

^a UNIVERSITY OF ESSEX   (United Kingdom)

^b LONDON METROPOLITAN UNIVERSITY   (United Kingdom)

Author keywords

'True' risk premia; Forward premium puzzle; Fractional cointegration; Market efficiency; Structural breaks; Traded volatility

Indexed keywords

EID: 46349090769     PISSN: 09275398     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jempfin.2007.10.002     Document Type: Article

References (63)

1. Agiakloglou C., Newbold P., and Wohar M. Bias in an estimator of the fractional difference parameter. Journal of Time Series Analysis 14 (1992) 235-246
2. Bacchetta P., Mertens E., and van Wincoop E. Predictability in financial markets: what do survey expectations tell us?. Discussion Paper Series No. 5770 (2006), Centre for Economic Policy Research (CEPR)
3. Backus D., Gregory A., and Telmer C. Accounting for forward rates in markets for foreign currency. Journal of Finance 11 (1993) 1887-1908
4. Bai J., and Perron P. Estimating and testing linear models with multiple structural changes. Econometrica 66 (1998) 47-68
5. Bai J., and Perron P. Computation and analysis of multiple structural change models. Journal of Applied Econometrics 18 (2003) 1-22
6. Bai J., and Perron P. Critical values in multiple structural change tests. Econometrics Journal 6 (2003) 72-78
7. Bai, J., Perron, P., . in press. Multiple structural change models: A simulation study. In: D. Corbea, S. Durlauf and B. Hansen (Eds), Econometric essays, Cambridge University Press: Cambridge.
8. Baillie R.T., and Bollerslev T. The long memory of the forward premium. Journal of International Money and Finance 13 (1994) 565-571
9. Baillie R.T., and Bollerslev T. The forward premium anomaly is not as bad as you think. Journal of International Money and Finance 19 (2000) 471-488
10. Baillie R.T., Bollerslev T., and Mikkelsen H.O. Fractionally integrated generalized autoregressive heteroscedasticity. Journal of Econometrics 74 (1996) 3-30
11. Baillie, R.T., Han, Y.W., Koul, H.L. 2002. A high frequency perspective on the forward premium anomaly. Mimeo; Department of Economics; Michigan State University.
12. Barnhart S.W., and Szakmary A.C. Testing the unbiased forward rate hypothesis: evidence on unit roots, cointegration and stochastic coefficients. Journal of Financial and Quantitative Analysis 26 (1991) 245-267
13. Bekaert G., Hodrick R., and Marshall D. The implications of first-order risk aversion for asset market risk premiums. Working Paper no.4624 (1994), NBER Cambridge, MA
14. Chinn M., and Meredith G. Monetary policy and long-horizon uncovered interest parity. IMF Staff Papers 51 (2004) 409-430
15. Choi H., and Zivot E. Long memory and structural changes in the forward discount: an empirical investigation. Journal of International Money and Finance 26 (2007) 342-363
16. Crowder W.J. Foreign exchange market efficiency and common stochastic trends. Journal of International Money and Finance 13 (1994) 551-564
17. Crowder W.J. Covered interest parity and international capital market efficiency. International Review of Economics and Finance 4 (1995) 115-132
18. Davidson J. Testing for fractional cointegration: The relationship between government popularity and economic performance in the UK. In: Diebolt C., and Kyrtsou C. (Eds). New Trends in Macroeconomics (2005), Springer, Berlin 147-171
19. Dittman I. Fractional cointegration of voting and non-voting shares. Applied Financial Economics 11 (2001) 321-332
20. Diebold F., and Inoue A. Long memory and regime switching. Journal of Econometrics 105 (2001) 131-159
21. Doornik J. Object-oriented matrix programming using Ox (1999), Timberlake Consultants Press, London
22. Dunis C., and Huang X. Forecasting and trading currency volatility: an application of recurrent neural regression and model combination. Journal of Forecasting 21 (2002) 317-354
23. Dunis C., Laws J., and Chauvin S. FX volatility forecasts: a fusion-optimisation approach. Neural Network World 10 (2000) 187-202
24. Chinn M., and Frankel J. Survey data on exchange rate expectations: more currencies, more horizons, more tests. In: Allen W., and Dickinson D. (Eds). Monetary policy, capital flows and financial market developments in the era of financial globalisation: Essays in honor of Max Fry (2002), Routledge, London 145-167
25. Engel C. The forward discount anomaly and the risk premium: a survey of recent evidence. Journal of Empirical Finance 3 (1996) 123-192
26. Engel C. On the foreign exchange risk premium in sticky-price general equilibrium models. In: Isard P., Razin A., and Rose A. (Eds). International finance and financial crises: Essays in honor of Robert P. Flood (1999), IMF and Kluwer 71-85
27. Evans M., and Lewis K. Do long term swings in the dollar affect estimates of the risk premia?. Review of Financial Studies 8 (1995) 709-742
28. Fama E.F. Efficient capital markets, a review of theory and empirical work. Journal of Finance 25 (1970) 383-414
29. Geweke J., and Porter-Hudak S. The estimation and application of long memory time series models. Journal of Time Series Analysis 4 (1983) 221-238
30. Granger C., and Joyeux R. An introduction to long-memory models and fractional differencing. Journal of Time Series Analysis 1 (1980) 15-39
31. Granger C., and Hyung N. Occasional structural breaks and long memory with an application to the S&P500 absolute stock returns. Journal of Empirical Finance 11 (2004) 399-421
32. Hassler U., Marmol F., and Velasco C. Residual log-periodogram inference for long-run relationships. Journal of Econometrics 130 (2006) 165-207
33. Hai W., Nelson M., and Wu Y. Understanding spot and forward exchange rate regressions. Journal of Applied Econometrics 12 (1997) 715-734
34. Hirschleifer D. Investor psychology and asset pricing. Journal of Finance 56 (2001) 1533-1597
35. Horvath M., and Watson M. Testing for cointegration when some of the cointegrating vectors are known. Econometric Theory 11 (1995) 984-1014
36. Hosking J. Fractional differencing. Biometrika 68 (1981) 165-176
37. Jorion P. Predicting volatility in the foreign exchange market. Journal of Finance 50 (1995) 507-528
38. Kellard N., Newbold P., and Rayner A. Evaluating currency market efficiency: are cointegration tests appropriate?. Applied Financial Economics 11 (2001) 681-691
39. Kim C., and Phillips P.C.B. Fully modified estimation of fractional cointegration models. Working Paper (2001), Yale University
40. Kuersteiner G. Net present value models for exchange rates. Working Paper (1996), Yale University
41. Liu W., and Maynard A. Testing forward rate unbiasedness allowing for persistent regressors. Journal of Empirical Finance 12 (2005) 613-628
42. Maynard A. Testing for forward-rate unbiasedness: on regression in levels and in returns. The Review of Economics and Statistics 85 (2003) 313-327
43. Maynard A. The forward premium anomaly: Statistical artefact or economic puzzle? New evidence from robust tests. Canadian Journal Of Economics 39 (2006) 1244-1281
44. Maynard A., and Phillips P.C.B. Rethinking an old empirical puzzle: econometric evidence on the forward discount anomaly. Journal of Applied Econometrics 16 (2001) 671-708
45. Meese R.A., and Singleton K.J. On unit roots and the empirical modelling of exchange rates. Journal of Finance 37 (1982) 1029-1035
46. Mehra Y.P. Velocity and Variability of Money Growth: evidence from Granger Causality Tests. Journal of Money, Credit and Banking 21 (1989) 262-267
47. Newbold P., Wohar M., Rayner A., Kellard N., and Ennew C. Two puzzles in the analysis of foreign exchange market efficiency. International Review of Financial Analysis 7 (1998) 95-111
48. Ng S., and Perron P. Estimation and inference in nearly unbalanced nearly cointegrated systems. Journal of Econometrics 79 (1997) 53-81
49. Obstfeld M., and Rogoff K. Foundations of international macroeconomics (1996), MIT Press, Cambridge, MA
50. Pynnönen S., and Knif J. Common long-term and short-term price memory in two Scandinavian stock markets. Applied Financial Economics 8 (1998) 257-265
51. Radchenko S. A new test of the money supply volatility hypothesis. Department of Economics (2003), Rutgers University
52. Robinson P.M. Log-periodogram regression of time series with long range dependence. Annals of Statistics 23 (1995) 1048-1072
53. Robinson P.M. Gaussian semi-parametric estimation of long range dependence. Annals of Statistics 23 (1995) 1630-1661
54. Robinson P.M., and Marinucci D. Semiparametric frequency domain analysis of fractional cointegration. STICERD Working Paper (1998), London School of Economics and Political Science EM/98/350
55. Roll R., and Yan S. An explanation of the forward premium puzzle. European Financial Management 6 (2000) 121-148
56. Sakoulis G., and Zivot E. Time variation and structural change in the forward discount: implications for the forward rate unbiasedness hypothesis. Working Paper (2004), University of Washington
57. Sarantis, N., 2006. Testing uncovered interest rate parity using traded volatility, a time varying risk premium and heterogeneous expectations. Journal of International, Money and Finance 25, 1168-1186.
58. Sarno L., Valente G., and Leon H. Nonlinearity in deviations from uncovered interest parity: An explanation of the forward bias puzzle. Review of Finance 10 (2006) 443-482
59. Thornton J. Friedman's money supply volatility hypothesis: some international evidence. Journal of Money, Credit and Banking 27 (1995) 288-292
60. Tse Y., Anh V., and Tieng A. No-cointegration test based on fractional differencing: some Monte Carlo results. Journal of Statistical Planning and Inference 80 (1999) 257-267
61. Velasco C. Non-stationary log-periodogram regression. Journal of Econometrics 91 (1999) 325-371
62. Velasco C. Gaussian semiparametric estimation of fractional cointegration. Journal of Time Series Analysis 24 (2003) 345-378
63. Zivot E. Cointegration and forward and spot exchange rate regressions. Journal of International Money and Finance 19 (2000) 785-812