Possible solutions to the forward bias paradox

This note outlines the economic theory behind the theory of uncovered interest parity and some of the econometric issues involved in testing and interpretation. I illustrate some of the issues involved by estimating a rolling regression of the forward premium regression from 22 years of eight major...

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Bibliographic Details
Published inJournal of international financial markets, institutions & money Vol. 21; no. 4; pp. 617 - 622
Main Author Baillie, Richard T.
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.10.2011
Elsevier
Elsevier Science Ltd
SeriesJournal of International Financial Markets, Institutions and Money
Subjects
Bias
Econometrics
Economic theory
Foreign exchange rates
Forward premium anomaly
Interest rate parity theorem
International finance
Regression analysis
Studies
C31
Forward premium anomaly
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Summary:This note outlines the economic theory behind the theory of uncovered interest parity and some of the econometric issues involved in testing and interpretation. I illustrate some of the issues involved by estimating a rolling regression of the forward premium regression from 22 years of eight major currencies. I also conclude that Pippenger's model is not consistent with the theory of UIP and that furthermore there are severe econometric problems in estimating his model. The forward premium anomaly remains a paradox in international finance that is important and worthwhile to understand more fully.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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ISSN:1042-4431
1873-0612
DOI:10.1016/j.intfin.2011.05.004