Why Does the Spot-Forward Discount Fail to Predict Changes in Future Spot Rates?

✍ Scribed by Charles A.E. Goodhart; Patrick C. McMahon; Yerima L. Ngama

• Book ID: 101284915
• Publisher: John Wiley and Sons
• Year: 1997
• Tongue: English
• Weight: 131 KB
• Volume: 2
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/(sici)1099-1158(199704)2:2<121::aid-ijfe40>3.0.co;2-t

✦ Synopsis

We use the Phillips and Hansen (1990) modified procedure to estimate the cointegrating vector between F t , the forward exchange rate, and S t1 , the appropriate spot rate. We find that the coefficient b, from the equation, S t1 a bF t e t1 to be very close to, but significantly different from, 1 (at about 0.97), as we had expected on theoretical grounds. With b 6 1, running the equation S t1 ÿ S t a bF t ÿ S t u t will involve misspecification, which will bias the measured value of b towards 0. # 1997 by