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Forward Premiums And Market Efficiency: Panel Unit-Root Evidence From The Term Structure Of Forward Premiums, Atreya Chakraborty
Forward Premiums And Market Efficiency: Panel Unit-Root Evidence From The Term Structure Of Forward Premiums, Atreya Chakraborty
Atreya Chakraborty
A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root test – the Johansen likelihood ratio (JLR) test – to forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market …
Nearest-Neighbor Forecasts Of U.S. Interest Rates, Atreya Chakraborty
Nearest-Neighbor Forecasts Of U.S. Interest Rates, Atreya Chakraborty
Atreya Chakraborty
We employ a nonlinear, nonparametric method to model the stochastic behavior of changes in several short and long term U.S. interest rates. We apply a nonlinear autoregression to the series using the locally weighted regression (LWR) estimation method, a nearest-neighbor method, and evaluate the forecasting performance with a measure of root mean square error (RMSE). We compare the forecasting performance of the nonparametric fit to the performance of two benchmark linear models: an autoregressive model and a random-walkwith-drift model. The nonparametric model exhibits greater out-of-sample forecast accuracy that that of the linear predictors for most U.S. interest rate series. The …