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The solution to the forward-bias puzzle: Reply

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  • John, Pippenger

Abstract

My proposed econometric solution to the forward-bias puzzle provoked several comments. Those comments raise three primary objections to my solution. (1) It suffers from multicollinearity, miss-specification and other serious econometric problems. (2) My key test equation is a tautology or identity. (3) My econometric solution has nothing to do with either the forward-bias puzzle or uncovered interest parity. This is my reply to those objections.

Suggested Citation

  • John, Pippenger, 2011. "The solution to the forward-bias puzzle: Reply," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 629-636, October.
    • Handle: RePEc:eee:intfin:v:21:y:2011:i:4:p:629-636
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    References listed on IDEAS

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    1. Pippenger, John, 2011. "The solution to the forward-bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 296-304, April.
    2. Pippenger, John, 2011. "A Complete Solution To The Forward-Bias Puzzle," University of California at Santa Barbara, Economics Working Paper Series qt5gq9z4j0, Department of Economics, UC Santa Barbara.
    3. Sanders S., Chang, 2011. "On the (in)feasibility of covered interest parity as a solution to the forward bias puzzle," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 611-616, October.
    4. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    5. Jessica James & Kristjan Kasikov & Aysu Secmen, 2009. "[image omitted] Uncovered interest parity and the FX carry trade," Quantitative Finance, Taylor & Francis Journals, vol. 9(2), pages 123-127.
    6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2008. "Carry Trade: The Gains of Diversification," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 581-588, 04-05.
    7. Christian, Müller, 2011. "The forward-bias puzzle: Still unsolved," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 605-610, October.
    8. Fong, Wai-Ming & Valente, Giorgio & Fung, Joseph K.W., 2010. "Covered interest arbitrage profits: The role of liquidity and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1098-1107, May.
    9. Richard T., Baillie, 2011. "Possible solutions to the forward bias paradox," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 617-622, October.
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    Cited by:

    1. Dominique Torre, 2012. "The monetary views of Paul Einzig," Post-Print halshs-00726126, HAL.
    2. Norman C. Miller, 2014. "Exchange Rate Economics," Books, Edward Elgar Publishing, number 14981.

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