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Panel Unit-root Evidence from the

By John Barkoulas, Christopher F. Baum and Atreya Chakraborty

Abstract

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 efficiency, for six major currencies

Topics: Forward premium, currency risk premium, panel unit-root tests, foreign exchange market efficiency
Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.194.9278
Provided by: CiteSeerX
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