This study investigates whether the ignored structural break causes the forward premium non-stationary. This paper proposes to test for the presence of unit root with multiple structural breaks. We find that, as long as the dynamic lag structure is specified, the forward premium exhibits a non-stationary process even if structural breaks are accounted for and points to no evidence of moving toward stationarity. Given our findings, the structural change model seems less robust in explaining the forward premium puzzle.
- Forward premium puzzle
- Forward rate unbiasedness hypothesis
- Unit roots with structural changes
ASJC Scopus subject areas
- Economics and Econometrics