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Can exchange rate volatility explain persistence in the forward premium?

Kellard, N and Sarantis, N (2008) 'Can exchange rate volatility explain persistence in the forward premium?' Journal of Empirical Finance, 15 (4). 714 - 728. ISSN 0927-5398

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Abstract

The persistence of the forward premium has been cited both as evidence of the failure of the unbiasedness hypothesis and as rationale for the forward premium anomaly. This paper examines the recent proposition that forward premium persistence can be explained solely by the conditional variance of the spot rate. We provide theoretical and empirical evidence to challenge this proposition. Our empirical results are shown to be robust to the presence of structural breaks. A corollary of the results is that the 'true' risk premium contains a long memory component. This is non-standard and has implications for the construction of rational expectations models of the foreign exchange market. © 2007 Elsevier B.V. All rights reserved.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Neil Kellard
Date Deposited: 15 Nov 2011 10:15
Last Modified: 27 Nov 2017 12:15
URI: http://repository.essex.ac.uk/id/eprint/1502

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