Cointegration and forward and spot exchange rate regressions |
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Authors: | Eric Zivot |
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Affiliation: | Department of Economics, University of Washington, Box 353330, Seattle, WA 98195-3330, USA |
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Abstract: | We investigate the relationship between cointegration models of the current spot exchange rate, st, and the current forward rate, ft, and cointegration models of the future spot rate, st+1, and ft and the implications of this relationship for tests of the forward rate unbiasedness hypothesis (FRUH). We show that simple models of cointegration between st and ft imply complicated models of cointegration between st+1 and ft. Consequently, standard methods are often inappropriate for modeling the cointegrated behavior of (st+1, ft)′ and we show that the use of such methods can lead to erroneous inferences regarding the FRUH. |
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Keywords: | Cointegration Exchange rates Forward rate unbiasedness hypothesis Weak exogeneity |
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