Does the forward premium puzzle disappear over the horizon? |
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Authors: | Stuart Snaith Jerry CoakleyNeil Kellard |
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Institution: | Essex Finance Centre and Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK |
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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. |
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Keywords: | F31 G14 C15 C22 |
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