For best experience please turn on javascript and use a modern browser!
You are using a browser that is no longer supported by Microsoft. Please upgrade your browser. The site may not present itself correctly if you continue browsing.

Lucio Sarno (Warwick). Economics Colloquia.

Event details of The Forward Bias Puzzle and Nonlinearity in Deviations from Uncovered Interest Parity: A New Perspective
Date 13 October 2005
Time 12:15 -13:15

Lucio Sarno (Warwick)

The Forward Bias Puzzle and Nonlinearity in Deviations from Uncovered Interest Parity: A New Perspective

Abstract:
We provide empirical evidence that deviations from the uncovered interest rate parity (UIP) condition display significant nonlinearities, which have a natural interpretation consistent with several recent theories based on transactions costs or limits to speculation in the foreign exchange market. This evidence suggests that the forward bias documented in the literature may be less indicative of major inefficiencies in the foreign exchange market than previously thought.
Further, Monte Carlo experiments allow us to reconcile our results with the large empirical literature on the forward bias puzzle since we show that, if the true data generating process of UIP deviations were of the nonlinear form we consider, estimation of conventional linear spot-forward regressions would generate the well known anomalies documented in much previous research.


In association with the Tinbergen Institute.

Organisers:

  • Franc Klaassen (AE)
  • Maurice Bun (KE)
  • Aljaz Ule (AE/CREED)
  • Florian Wagener (KE/CeNDEF)

Deelname