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1、WorldEconomy-ForwardPremiumPuzzle1(entrywrittenforthePrincetonEncyclopediaoftheWorldEconomy)©MenzieChinn,2007.ForwardPremiumPuzzleDefinitionsandRelatedConceptsTheforwardpremiumpuzzleiscloselyrelatedtothefailureofuncoveredinterestparitytohold,andthephenomenonofforwardratebias.Thepuzzleisthefindingth
2、attheforwardpremiumusuallypointsinthewrongdirectionfortheexpostmovementinthespotexchangerate.Uncoveredinterestparitystatesthat,ifcoveredinterestparityholds,thentheforwarddiscountandhencetheinterestdifferential,shouldbeanunbiasedpredictoroftheexpostchangeinthespotrate,assumingrationalexpectations.Th
3、eforwardratebiaspuzzleisgivenbythefactthattheforwardratedoesnotprovideanunbiasedforecastofthefuturespotrate.Tofixconceptsandterms,definetheforwardrateattimetforatradetooccuratktimekasFandthespotrateattimetasS.Further,letthesubjectiveexpectationofttthespotrateattimet+k,basedupontimetinformation,bede
4、finedasε(S).Assumett+kforthemomentrationalexpectations,viz.,E(S).Thenoneshouldexpect:tt+kkS=F+u(1)t+ktt+kWheretheerrortermisanexpectationalerror.Inreality,regressionestimatesdonotfindaregressioncoefficientofunity,althoughthepointestimateisoftennotstatisticallysignificantlyfarfromthepositedvalue.Amo
5、reproblematicaspectofsuchregressionsisthattheestimatedregressionerrortermoftenexhibitsserialcorrelation,violatingtherationalexpectationshypothesis.1WorldEconomy-ForwardPremiumPuzzle2(entrywrittenforthePrincetonEncyclopediaoftheWorldEconomy)©MenzieChinn,2007.Theforwardpremiumpuzzlecanbeidentifiedbya
6、ssumingthattheerrortermislognormallydistributed,sothat(1)canberewrittenas:k~s=β+βf+u(2)t+k01tt+kWhereunderthenullhypothesis,β=1,andβisallowedtoequalsomeconstant10impoundingsomeJensensInequalityterms.Noticethatonecansubtractthecurrentlogspotratesfrombothsides,sincetunderthenullβ=1.Thisyields:1k~s−s=
7、β+β(f−s)+u(3)t+kt01ttt+kThelefthandsideofequation(3)isexpostdepreciation,whilethetermintheparenthesesistheforwarddiscount(orinverseoftheforwardpremium).Thepuzzleisthatestimatesofβarenotonlydifferentfromthev
