The Effect of Errors in Variables on Tests for a Risk Premium in Forward Exchange Rates

Conventional tests for a risk premium in the price of forward exchange use the subsequently realized spot rate as a proxy for prior expectations. Use of this proxy creates a serious errors-in-variables problem which makes it difficult to reject the null hypothesis of zero risk premium. Use of a better proxy for expectations indicates the presence of a risk premium in the forward exchange rate of all countries analyzed.     

The effect of the Senior Citizens' Freedom to Work Act of 2000 on employer-provided pension and medical plans

On April 7, 2000 President Clinton signed the Senior Citizens' Freedom to Work Act. The act reduces the Social Security retirement benefit penalties previously imposed on 65- through 69-year-old workers who earned more than nominal incomes after enrolling in the program. This article analyzes the impact that the act will have on retirement decisions of the affected cohorts of older workers and closes with an analysis of how the act may affect employer-provided pension, medical and paid leave plans.     

Integration of International Long-Term Interest Rates: A Fractional Cointegration Analysis

In this study, we re-examine the relationship among interest rates on the long-term government bonds of five industrialized countries. Using both the variance ratio test and fractional cointegration analysis, we find significant evidence that indicates the five government bond rates are fractionally cointegrated. In specific, our results show that the error correction term of the system of the five interest rates follows a mean-reverting, fractionally integrated process.     

Mortgage Refinancing Activity: An Explanation [1990–2001]

Mortgage refinancing activity reached unprecedented high levels during 1990–2001. Using GARCH to control for heteroskedasticity and separating the data into regimes to control for potential structural changes over time, we estimate a model explaining changes in mortgage refinancing activity over the period studied. We find changes in refinancing activity to be negatively related to current as well as past changes in the 30-year mortgage rate with a declining significant lag over time. Similarly, there is a significant lagged dependent variable with a declining lag. Moreover, mortgage refinancing activity is a substitute for other investments during certain regimes. These results offer evidence that home owners cash out the mortgage for other investments. The lags suggest that the process is delayed for a variety of reasons. The declining lag signals a faster response by consumers. The reasons for a faster response include a consumer perception that interest rates have “bottomed out,” the presence of an increase in consumer sophistication, and improvements in technology and market coordination that facilitate and reduce the cost of the refinancing process.