A comment on: “The solution to the forward-bias puzzle” |
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Authors: | Alan King |
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Affiliation: | Department of Economics, University of Otago, PO Box 56, Dunedin 9054, New Zealand |
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Abstract: | Pippenger (2011) recently proposed a solution to the longstanding forward-bias puzzle. He argues that the puzzling estimates obtained using the standard equation for the efficient markets hypothesis are due to omitted variable bias. He identifies the missing variables as the future change in the forward exchange rate and the future interest differential. When these are added to the standard equation, he finds a one-to-one relationship between the future change in the spot rate and the forward premium. However, we argue that his equation can only test covered interest parity and offers no insight into the forward-bias puzzle. |
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Keywords: | JEL classification: E44 F31 G14 G15 |
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