Coakley, Jerry and Fuertes, Ana-Maria (2001) Rethinking the forward premium puzzle in a non-linear framework. Working Paper. Warwick Business School Financial Econometrics Research Centre, University of Warwick.

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Abstract

The forward premium puzzle needs to be reformulated since extant studies address the negative slopes associated with the long dollar swings of the 1980s. By contrast the insignificant coefficients from recent data spans can be explained by an unbalanced regression problem caused by asymmetries in spot returns. These stem from market frictions such as transaction costs and are associated with overshooting of spot rates. Monte Carlo experiments show that asymmetries and overshooting effects produce widely dispersed and statistically insignificant slope coefficients whose small sample mean is close to zero.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Foreign exchange -- Mathematical models
Series Name:	Working Papers Series
Publisher:	Warwick Business School Financial Econometrics Research Centre
Place of Publication:	University of Warwick
Date:	May 2001
Volume:	Vol.2001
Number:	No.6
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
URI:	http://wrap.warwick.ac.uk/id/eprint/1821

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