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Nonlinearity as an explanation of the forward exchange rate anomaly

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  • Derek Bond
  • Michael Harrison
  • Niall Hession
  • Edward O'Brien

Abstract

This article shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984). Using sterling-Canadian dollar data and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision.

Suggested Citation

  • Derek Bond & Michael Harrison & Niall Hession & Edward O'Brien, 2010. "Nonlinearity as an explanation of the forward exchange rate anomaly," Applied Economics Letters, Taylor & Francis Journals, vol. 17(13), pages 1237-1239.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:13:p:1237-1239
    DOI: 10.1080/00036840902950564
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    More about this item

    JEL classification:

    • 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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