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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

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✦ 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 ΓΏ S t a bF t ΓΏ S t u t will involve misspecification, which will bias the measured value of b towards 0. # 1997 by


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