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Can structural changes in the persistence of the forward premium explain the forward premium anomaly?

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  • Cho, Dooyeon
  • Chun, Sungju

Abstract

This paper investigates possible structural changes in the persistence of the forward premium by applying the multiple structural break methodology recently proposed by Kejriwal et al. (2013). The results reveal three or four breaks over the last three decades and provide evidence of long memory within each sub regime. The estimated break dates for the persistence appear to correspond to major economic events caused by macroeconomic shocks or changes in monetary policy. We provide some implications for the forward premium anomaly: if the forward premium is strictly stationary and has long memory, in which the confidence interval includes only the stationary region, the anomaly appears to be resolved or uncovered interest rate parity tends to hold. This finding suggests that the degree of the persistence of the forward premium plays an important role in explaining the anomaly.

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  • Cho, Dooyeon & Chun, Sungju, 2019. "Can structural changes in the persistence of the forward premium explain the forward premium anomaly?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 225-235.
    • Handle: RePEc:eee:intfin:v:58:y:2019:i:c:p:225-235
    DOI: 10.1016/j.intfin.2018.11.003
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    Cited by:

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    2. Katarzyna Czech & Łukasz Pietrych, 2021. "The Efficiency of the Polish Zloty Exchange Rate Market: The Uncovered Interest Parity and Fractal Analysis Approaches," Risks, MDPI, vol. 9(8), pages 1-17, August.
    3. Bilson, Chris & Brailsford, Tim & Rajaguru, Gulasekaran, 2022. "Covered interest rate parity deviations in the Asia-Pacific," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    4. Cho, Dooyeon, 2021. "On the predictability of the distribution of excess returns in currency markets," International Journal of Forecasting, Elsevier, vol. 37(2), pages 511-530.
    5. Cho, Dooyeon & Han, Heejoon, 2021. "The tail behavior of safe haven currencies: A cross-quantilogram analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 70(C).
    6. Kumar, Satish, 2019. "Does risk premium help uncover the uncovered interest parity failure?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Forward premium; Persistence; Structural change; Hybrid testing procedure;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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