Evans, M.D.D. and Lewis, K.K. (1995) Do long-term swings in the dollar affect estimates of the risk premia? Review of Financial Studies 8, No 3, 709-742.  Home/Search   Document Not in Database   Summary   Related Articles   Check

....However, even when expectations are rational, the forward premium (or the interest rate differential) may be correlated with forecast errors over short samples if agents expect a major policy shift that does not occur in the sample. This is the so called peso problem (see Krasker, 1980) Indeed, Evans and Lewis (1995) estimated a switching regimes model, which allows for potential peso problem effects, and did not reject the hypothesis that the forward premium plus an estimated risk premium is equal to the expected exchange rate for three major U.S. dollar exchange rates. Also, they 3 provided evidence that ....

....UIP, they cannot be tested formally since the assumed policy rules are not informative with regard to the time series properties of the underlying variables. Therefore, in this paper we combine the idea that the UIP puzzle may be due to central bank interventions, with the time series approach of Evans and Lewis (1995) which allows for potential peso problem effects. Specifically, it is shown that when monetary authorities manage the interest rate differential through a standard policy rule, which is subject to occasional discrete shifts, then a Markov switching regimes representation is appropriate for the ....

[Article contains additional citation context not shown here]

Evans, M.D.D. and Lewis, K.K. (1995) Do long-term swings in the dollar affect estimates of the risk premia? Review of Financial Studies 8, No 3, 709-742.

....that sense, the cointegration of t k S and t f with a unitary cointegrating vector is a necessary condition for the FRUH. 4 finds that the evidence of cointegratedness between t k S and t f and the specific cointegrating relationship varies across currencies and forward contract horizon. Evans and Lewis (1995) find evidence of cointegration between t k S and t f but they reject the null of a unitary cointegrating vector. 5 Through comprehensive testing among alternative VAR specifications with respect to treatment of the constant term and lag length structures, Luintel and Paudyal (1998) find ....

Evans, M. and K. Lewis (1995), Do long-term swings in the dollar affect estimates of the risk premia? Review of Financial Studies, 709-742.

....the same across regimes, we can also reject the null that there is no regime switching. By using a null hypothesis that is more 9. The notation (or ) denotes the expectation of conditional on the fact that the state at t is C (or S) and on all other information available at time t. 10. As noted by Evans and Lewis (1995), a two state first order Markov process is not compatible with (EQ 6) They reconcile this by modifying the usual two state Markov model to allow for jumps in asset prices when the regime changes. E t X j C ( E t X j S ( X j Pr S t 0 S t 1 0 = 1 P rS t 1 S t 1 1 = ....

Evans, Martin D. D. and Karen Lewis. 1995. "Do long-term swings in the dollar affect estimates of the risk premia?" Review of Financial Studies 8(3):709-42.

....model presented here has one state q(t)# Pr ( S t# 0 S t#1# 0) p(t)# Pr ( S t# 1 S t#1# 1) independent probability This is the special case of the Markov model where q(t)# Pr (S t# 0) q(t)# 1#p(t) i.e. the probability of today s state is independent of the state yesterday. Evans and Lewis (1995) note that the standard Markov model is not compatible with the assumption that the expected rate of return is the same across the two states; our restriction is sufficient to ensure that this condition is satisfied. 11. This can also be interpreted as a test of asset pricing models, like that in ....

Evans, M. D. D. and K. Lewis (1995). "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?" Review of Financial Studies, 8, 709-742.

....6. Maddala (1993) argues that the usual techniques for bootstrapping are not valid for unit root or cointegrated systems and that there is no consensus on whether some of the proposed alternatives are reliable. Nonetheless, standard bootstrap methods have been used in other published studies; see Evans and Lewis (1995) or Cushman et al. 1996) P 0 = P 7 applied (such as the original tabulations of Dickey Fuller t statistics) then it would be reasonable to try to make these estimates as precise as possible. Instead, our purpose is to determine whether a set of asymptotic critical values leads to reliable ....

Evans, Martin D. D. and Karen Lewis. 1995. "Do long-term swings in the dollar affect estimates of the risk premia?" Review of Financial Studies 8(3), 709-742.

....that appears to reject this characterization in a surprising way. They show that, according to some tests, some excess returns appear to contain a unit root. Of the four papers of which we are aware, three provide evidence from foreign exchange markets; Evans and Lewis (1993) herinafter EL93) Evans and Lewis (1995) (herinafter EL95) and Crowder (1994) All three begin with the premise that the log of 1 the spot exchange rate is I(1) Therefore, if it is not cointegrated with the log of the k f t x k t# s t #k # f k x t 112 MARIE JOSE GODBOUT AND SIMON VAN NORDEN period forward rate , or, more ....

....with three cointegrating vectors and homoskedastic errors, increasing the number of lags from one to three lowers the 1 per cent critical value from 63.99 to 48.26. This is consistent with the hypothesis that the combination of an important MA component and few lags are driving their results. 1. 2 Evans and Lewis (1995) 1.2.1 Summary EL95 use the same data set as EL93 but, as discussed in endnote 9, work under the s t#k# # 0 ## 1 # f t # ( 3 n 3 # n ##f t#n #u t # 1 3 2 # 1# 1 3 2 (3) s t#k # 1# 1 # 1# 1 s f t 116 MARIE JOSE GODBOUT AND SIMON VAN NORDEN assumption that spot and ....

[Article contains additional citation context not shown here]

Evans, M. D. D. and K. Lewis (1995). "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?" Review of Financial Studies, 8, 709-742.

Online articles have much greater impact   More about CiteSeer.IST   Add search form to your site   Submit documents   Feedback  

CiteSeer.IST - Copyright Penn State and NEC