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Some Empirical Observations on the Forward Exchange Rate Anomaly

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  • Bond, Derek

    (University of Ulster)

  • Harrison, Michael J

    (Trinity College Dublin)

  • Hession, Niall

    (University of Ulster)

  • O’Brien, Edward J.

    (Central Bank and Financial Services Authority of Ireland)

Abstract

This paper looks at issues surrounding the testing of fractional integration and nonlinearity in relation to the forward exchange rate anomaly of Fama (1984). Recent tests for fractional integration and nonlinearity are discussed and used to investigate the behaviour of three exchange rates and premiums. The findings provide some support for I(1) exchange rates but suggest fractionality for premiums, mixed evidence on cointegration, and a strong possibility of time-wise nonlinearity. Significantly, when the nonlinearity is modelled using a random field regression, the forward anomaly disappears.

Suggested Citation

  • Bond, Derek & Harrison, Michael J & Hession, Niall & O’Brien, Edward J., 2006. "Some Empirical Observations on the Forward Exchange Rate Anomaly," Research Technical Papers 3/RT/06, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:3/rt/06
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    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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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