Bond, Derek Hession, Niall Harrison, Michael J. O'Brien, Edward J.
Year of Publication:
Working Paper Series, UCD Centre for Economic Research 08/01
This paper shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984). 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: the anomaly disappears.
Forward exchange rate anomaly nonlinearity random field regression