Possible solutions to the forward bias paradox |
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Authors: | Richard T Baillie |
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Institution: | aDepartments of Economics and Finance, Michigan State University, USA;bSchool of Economics and Finance, Queen Mary University of London, UK;cRimini Center for Economic Analysis, Italy |
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Abstract: | This note outlines the economic theory behind the theory of uncovered interest parity and some of the econometric issues involved in testing and interpretation. I illustrate some of the issues involved by estimating a rolling regression of the forward premium regression from 22 years of eight major currencies. I also conclude that Pippenger's model is not consistent with the theory of UIP and that furthermore there are severe econometric problems in estimating his model. The forward premium anomaly remains a paradox in international finance that is important and worthwhile to understand more fully. |
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Keywords: | JEL classification: C31 |
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