Premium
Parity conditions and the efficiency of the Australian 90‐ and 180‐day forward markets
Author(s) -
Felmingham Bruce,
Leong SuSan
Publication year - 2004
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2004.08.003
Subject(s) - ordinary least squares , econometrics , economics , risk premium , interest rate parity , parity (physics) , exchange rate , financial economics , monetary economics , physics , particle physics
Covered Interest Parity (CIP) holds in the 90 and 180 forward market for the AUD/USD spot exchange rate provided fully modified least absolute deviation model (FM‐LAD) procedures are applied to daily data for the period from December 2, 1985 to December 29, 2000. CIP fails if corrected ordinary least squares (OLS) and fully modified OLS (FM‐OLS) procedures are applied. However, UIP fails in both markets on early data: December 2, 1985 to December 31, 1991, but holds in the 90‐day market in a later subperiod: January 2, 1992 to December 29, 2000 FM. UIP is modified (M) to accommodate a potential risk premium. The MUIP model does not provide strong evidence suggesting the presence of a time‐varying risk premium (TRP).