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Structural change in the forward discount: a Bayesian analysis of forward rate unbiasedness hypothesis

Author

Listed:
  • Yi-Chi Chen

    (National Cheng Kung University)

  • Wei-Choun Yu

    (Winona State University)

Abstract

Using Bayesian methods, we reexamine the empirical evidence from Sakoulis et al. (2010) regarding structural breaks in the forward discount for G-7 countries. Our Bayesian framework allows the number and pattern of structural changes in level and variance to be endogenously determined. We find different locations of breakpoints for each currency; mostly, fewer breaks are present. We find little evidence of moving toward stationarity in the forward discount after accounting for structural change. Our findings suggest that the existence of structural change is not a viable justification for the forward discount anomaly.

Suggested Citation

  • Yi-Chi Chen & Wei-Choun Yu, 2011. "Structural change in the forward discount: a Bayesian analysis of forward rate unbiasedness hypothesis," Economics Bulletin, AccessEcon, vol. 31(2), pages 1807-1826.
    • Handle: RePEc:ebl:ecbull:eb-10-00711
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    References listed on IDEAS

    as
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    8. Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 471-488, August.
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    More about this item

    Keywords

    Bayesian method; structural change; forward discount anomaly; Gibbs-sampling;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F3 - International Economics - - International Finance

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