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Applied Economics Letters Volume 17, 2010 - Issue 13
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Original Articles

Nonlinearity as an explanation of the forward exchange rate anomaly

Derek Bond University of Ulster, Coleraine, Co. Londonderry, BT52 1SA, UK
,
Michael J. Harrison School of Economics, University College Dublin, Belfield, Dublin 4, Ireland
,
Niall Hession University of Ulster, Coleraine, Co. Londonderry, BT52 1SA, UK
&
Edward J. O'Brien European Central Bank, Kaiserstraβe 29, D-60311, Frankfurt, GermanyCorrespondence[email protected]
Pages 1237-1239 | Published online: 01 Sep 2009
 
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Abstract

This article shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, Citation1984). Using sterling-Canadian dollar data and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision.

Notes

The views expressed in this article do not necessarily reflect those of the European Central Bank or its members.

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