Explaining Bias in the Foreign Exchange Market: The Case of Traded Volatility and Fractional Cointegration

36 Pages Posted: 14 May 2004

See all articles by Neil Kellard

Neil Kellard

University of Essex - Essex Business School

Nicholas Sarantis

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

Abstract

The persistence of the forward premium has been cited both as evidence of the failure of the unbiasedness hypothesis and as rationale for the forward premium anomaly. Exploring the nature of this may provide useful insights into issues of market efficiency. This paper examines the proposition that the forward premium and the conditional variance of the spot rate are fractionally cointegrated using traded volatility as a measure of the latter. A corollary of the results is that the risk premium is non-stationary. Although non-standard, it is not inconsistent with risk premia derived from sticky-price general equilibrium models.

Keywords: market efficiency, traded volatility, fractional cointegration, Monte Carlo simulation, risk premium

JEL Classification: C14, C22, C32, F31, G14

Suggested Citation

Kellard, Neil and Sarantis, Nicholas, Explaining Bias in the Foreign Exchange Market: The Case of Traded Volatility and Fractional Cointegration. Available at SSRN: https://ssrn.com/abstract=496662 or http://dx.doi.org/10.2139/ssrn.496662

Neil Kellard (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44-1206-87-4153 (Phone)

Nicholas Sarantis

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

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