Testing the Persistence of the Forward Premium: Structural Changes or Misspecification?

Tsung Wu Ho, Wan Shin Mo

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)119-138
Number of pages20
JournalOpen Economies Review
Volume27
Issue number1
DOIs
Publication statusPublished - 2016 Feb 1
Externally publishedYes

Keywords

  • Forward premium puzzle
  • Forward rate unbiasedness hypothesis
  • Persistence
  • Predictability
  • Unit roots with structural changes

ASJC Scopus subject areas

  • Economics and Econometrics

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