TY - JOUR
T1 - Common stochastic trends between forward and spot exchange rates
AU - Luintel, K. B.
AU - Paudyal, K.
PY - 1998/4/6
Y1 - 1998/4/6
N2 - The common trend analyses between the forward rate (Ft) and the corresponding future spot rate of the same currency (St+1) have raised several issues: notably, the sensitivity of the cointegrating relation to a constant term and lag lengths and the non-stationarity of the risk premium. This paper addresses these issues more rigorously using the daily exchange rate of the pound Sterling vis-à-vis five major currencies viz. the Canadian dollar, French franc, German mark, Japanese yen, and US dollar. The appropriate deterministic term in the cointegrating space is identified through empirical tests. A robust cointegrating relation is found between Ft and St+1; however, the hypothesis of unbiasedness of forward rate could not be sustained. An alternative measure of risk premium is suggested and its stationarity is confirmed.
AB - The common trend analyses between the forward rate (Ft) and the corresponding future spot rate of the same currency (St+1) have raised several issues: notably, the sensitivity of the cointegrating relation to a constant term and lag lengths and the non-stationarity of the risk premium. This paper addresses these issues more rigorously using the daily exchange rate of the pound Sterling vis-à-vis five major currencies viz. the Canadian dollar, French franc, German mark, Japanese yen, and US dollar. The appropriate deterministic term in the cointegrating space is identified through empirical tests. A robust cointegrating relation is found between Ft and St+1; however, the hypothesis of unbiasedness of forward rate could not be sustained. An alternative measure of risk premium is suggested and its stationarity is confirmed.
KW - cointegration
KW - F31
KW - forward rate
KW - G14
KW - risk premium
KW - spot rate
UR - http://www.scopus.com/inward/record.url?scp=0001078770&partnerID=8YFLogxK
UR - https://www.sciencedirect.com/journal/journal-of-international-money-and-finance
U2 - 10.1016/S0261-5606(98)00003-5
DO - 10.1016/S0261-5606(98)00003-5
M3 - Article
AN - SCOPUS:0001078770
SN - 0261-5606
VL - 17
SP - 279
EP - 297
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
IS - 2
ER -