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The threshold nonstationary panel data approach to forward premiums

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  • Nagayasu, Jun

Abstract

This paper analyzes the stationarity of forward premiums in the foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we confirmed mixed evidence of stationary forward premiums. However, mounting evidence to support the stationarity is provided when regime shifts which likely reflect the effects of the Lehman Shock and changing monetary policies are considered. Thus these events seem to have increased the nonstationary element in the premiums, and our further analysis suggests the effect of these events can be captured by interest rates, leaving the covered interest parity condition as a valid long-run concept.

Suggested Citation

  • Nagayasu, Jun, 2011. "The threshold nonstationary panel data approach to forward premiums," MPRA Paper 34265, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:34265
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    References listed on IDEAS

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    More about this item

    Keywords

    Panel unit root tests; structural shifts; forward premiums; Lehman shock;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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