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Testing the Persistence of the Forward Premium: Structural Changes or Misspecification?

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  • Tsung-Wu Ho
  • Wan-Shin Mo

Abstract

This study investigates whether the ignored structural break causes the forward premium non-stationary. This paper proposes to test for the presence of unit root with multiple structural breaks. We find that, as long as the dynamic lag structure is specified, the forward premium exhibits a non-stationary process even if structural breaks are accounted for and points to no evidence of moving toward stationarity. Given our findings, the structural change model seems less robust in explaining the forward premium puzzle. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Tsung-Wu Ho & Wan-Shin Mo, 2016. "Testing the Persistence of the Forward Premium: Structural Changes or Misspecification?," Open Economies Review, Springer, vol. 27(1), pages 119-138, February.
    • Handle: RePEc:kap:openec:v:27:y:2016:i:1:p:119-138
    DOI: 10.1007/s11079-015-9365-9
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    Citations

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    Cited by:

    1. 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.
    2. Shehadeh, Ali A. & Li, Youwei & Vigne, Samuel A. & Almaharmeh, Mohammad I. & Wang, Yizhi, 2021. "The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies," International Review of Financial Analysis, Elsevier, vol. 78(C).
    3. Phungo, Muka & Bonga-Bonga, Lumengo, 2019. "An analysis of the unbiased forward rate hypothesis in developed and emerging economies," MPRA Paper 92222, University Library of Munich, Germany.
    4. Cho, Dooyeon, 2018. "On the persistence of the forward premium in the joint presence of nonlinearity, asymmetry, and structural changes," Economic Modelling, Elsevier, vol. 70(C), pages 310-319.

    More about this item

    Keywords

    Forward premium puzzle; Unit roots with structural changes; Predictability; Forward rate unbiasedness hypothesis; Persistence; F31; E43; G10;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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