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Does the forward premium puzzle disappear over the horizon?

Snaith, S and Coakley, J and Kellard, N (2013) 'Does the forward premium puzzle disappear over the horizon?' Journal of Banking and Finance, 37 (9). 3681 - 3693. ISSN 0378-4266

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Abstract

This paper provides the first comprehensive study of the horizon effect in tests of the forward rate unbiasedness hypothesis. It estimates Fama regressions employing 1-month through to 10-year horizon data for the five most heavily traded US dollar currency pairs pre-crisis 1980-2006. In contrast with extant studies, it fully deals with the econometric problems of long horizon regressions by means of a novel heteroskedastic- and autocorrelation-consistent bootstrap. The regression results confirm a clear horizon effect in that the slope coefficient approaches unity as the forward contract maturity is extended. The puzzle disappears at the 3-year horizon and beyond for all currencies. © 2013 Elsevier B.V.

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: Clare Chatfield
Date Deposited: 02 Aug 2013 21:10
Last Modified: 27 Nov 2017 12:15
URI: http://repository.essex.ac.uk/id/eprint/7218

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