The forward discount puzzle and market efficiency
The forward discount puzzle and market efficiency
We argue that the forward discount puzzle is primarily a statistical phenomenonand that statistical rejections of Uncovered Interest Parity do not necessarily constitute valid rejections of market efficiency. We find by using a Taylor expansion a theoretical negative bias in existing regressions of UIP. We propose two alternative tests for market efficiency, one of which is designed to measure the degree of market inefficiency. Our results from these tests indicate that for all four of the bilateral dollar parities studied the foreign exchange market is efficient despite decisive clear rejections of UIP using the conventional regression approach
119-135
Pilbeam, Keith
9a971256-9582-4b70-b6a8-bcafe7982218
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
February 2011
Pilbeam, Keith
9a971256-9582-4b70-b6a8-bcafe7982218
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Pilbeam, Keith and Olmo, Jose
(2011)
The forward discount puzzle and market efficiency.
Annals of Finance, 7 (1), .
(doi:10.1007/s10436-010-0159-1).
Abstract
We argue that the forward discount puzzle is primarily a statistical phenomenonand that statistical rejections of Uncovered Interest Parity do not necessarily constitute valid rejections of market efficiency. We find by using a Taylor expansion a theoretical negative bias in existing regressions of UIP. We propose two alternative tests for market efficiency, one of which is designed to measure the degree of market inefficiency. Our results from these tests indicate that for all four of the bilateral dollar parities studied the foreign exchange market is efficient despite decisive clear rejections of UIP using the conventional regression approach
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10.1007%2Fs10436-010-0159-1
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Published date: February 2011
Organisations:
Economics
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Local EPrints ID: 348578
URI: http://eprints.soton.ac.uk/id/eprint/348578
PURE UUID: 35355829-18e3-4756-b08c-126329f575cc
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Date deposited: 15 Feb 2013 11:51
Last modified: 15 Mar 2024 03:46
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Keith Pilbeam
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