Skip Navigation


Journal of Financial Econometrics Advance Access originally published online on February 24, 2009
Journal of Financial Econometrics 2009 7(3):312-338; doi:10.1093/jjfinec/nbp002
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow All Versions of this Article:
7/3/312    most recent
nbp002v2
nbp002v1
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Gospodinov, N.
Right arrow Search for Related Content
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

A New Look at the Forward Premium Puzzle

Nikolay Gospodinov
     Concordia University and CIREQ

Address correspondence to Nikolay Gospodinov, Department of Economics, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec H3G 1M8, Canada, or e-mail: nikolay.gospodinov{at}concordia.ca

JEL Classification: C13, C22, F31


  Abstract

This paper analyzes the sampling properties of the widely documented large negative slope estimates in regressions of future exchange returns on current forward premium. We argue that the abnormal behavior of the slope estimators in these regressions arises from the simultaneous presence of high persistence, low signal-to-noise ratio, strong endogeneity, and an omitted variable problem. The paper develops the limiting theory for the slope parameter estimators in the levels and differenced forward premium regressions under some assumptions that match the empirical properties of the data. The asymptotic results derived in the paper help to reconcile the findings from the levels and difference specifications and provide important insights about the time-series properties of the implied risk premium.

KEYWORDS: forward premium anomaly, high persistence, local-to-unity asymptotics, low signal-to-noise ratio

I would like to thank the Editor (René Garcia), an Associate Editor, and anonymous referees for very insightful comments and suggestions. Financial support from SSHRC (Canada) and FQRSC (Quebec) is gratefully acknowledged.

Received January 28, 2008; revised December 5, 2008; accepted January 28, 2009


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?




Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.