This study revisits the statistical relationship between the spot and the forward rate. Unlike previous studies, this association is measured by the estimation of the long-run correlation coefficient, a non-parametric measure of linear association. This estimator was shown to be equivalent to the Bartlett kernel spectral estimator of the complex coherency at frequency zero. This statistic allows for the measurement of the intensity of correlation. Using data for the £/DM over the May 1992 British General Election and September 1992 ERM devaluation, and for the FF/DM, BEF/DM, AT/DM, and NLG/DM up to the introduction of Euro, the results show that the predictive ability of the forward rate increased.
- peso problem
- long-run correlation coefficient
Kanas, A., & Ioannidis, C. (2012). Revisiting the forward-spot relation: an application of the nonparametric long-run correlation coefficient. Journal of Economics and Finance, 36(1), 148-161. https://doi.org/10.1007/s12197-010-9135-x