University of Leicester
Browse
dp11-23.pdf (261.82 kB)

The Forward Rate Premium Puzzle: A Resolution

Download (261.82 kB)
report
posted on 2011-04-20, 14:26 authored by Stephen G. Hall, P. A. V. B. Swamy, George S. Tavlas, Amangeldi Kenjegaliev
Empirical studies report that there is a negative relationship between the spot difference and forward premium. This result violates the forward rate unbiasedness theory. Using standard regression we found that recent samples give mixed results with both positive and negative coefficients. One possibility is that the negative coefficients could arise due to the non-linearities in the series and misspecification. To overcome these problems we employed a relatively novel technique. As an alternative to the standard regression we used a time-varying coefficient technique. This methodology estimates bias-free coefficients and thus should provide better estimates of the link between spot and forward rates. The findings of the time-varying coefficient model strongly support the forward rate unbiasedness hypothesis. All the parameters are very close to unity and significant. At the same time our results do not violate the efficient market theory.

History

Publisher

Dept. of Economics, University of Leicester

Available date

2011-04-20

Publisher version

http://www.le.ac.uk/ec/research/discussion/Papers2011.html

Book series

Papers in Economics;11/23

Language

en

Usage metrics

    University of Leicester Publications

    Categories

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC