Abstract
This study revisits the statistical relationship between the spot and the forward rate. Unlike previous studies, this association is measured by the estimation of the long-run correlation coefficient, a non-parametric measure of linear association. This estimator was shown to be equivalent to the Bartlett kernel spectral estimator of the complex coherency at frequency zero. This statistic allows for the measurement of the intensity of correlation. Using data for the £/DM over the May 1992 British General Election and September 1992 ERM devaluation, and for the FF/DM, BEF/DM, AT/DM, and NLG/DM up to the introduction of Euro, the results show that the predictive ability of the forward rate increased.
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Notes
A summary of these studies is provided in Hodrick (1987).
See Zivot (2000, page 789).
The optimally computed lag-length parameter, k, for the computation of the kernel, is remarkably stable as it assumes the value of unity in the vast majority of the estimation samples. The choice of the alignment parameter, a, varies considerably across samples assuming the value of −3 during the September 1992 devaluation both in the recursive and rolling sample calculations. The computed standard errors display a great deal of stability in the ‘rolling samples’ case.
Rolling estimation yielded qualitatively similar results. These results are not reported to converse space but are available upon request.
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We would like to thank an anonymous referee for important comments on a previous version of the paper. The usual disclaimer applies.
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Kanas, A., Ioannidis, C. Revisiting the forward—spot relation: an application of the nonparametric long-run correlation coefficient. J Econ Finan 36, 148–161 (2012). https://doi.org/10.1007/s12197-010-9135-x
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DOI: https://doi.org/10.1007/s12197-010-9135-x