Journal of Business & Economics Research – July 2008 Volume 6, Number 7
113
Nonlinearity And The Forward
Premium Anomaly
Apostolos Xanthopoulos, Illinois Institute Of Technology
ABSTRACT
Speculative efficiency (the ability to profit without bearing...
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Journal of Business & Economics Research – July 2008 Volume 6, Number 7
113
Nonlinearity And The Forward
Premium Anomaly
Apostolos Xanthopoulos, Illinois Institute Of Technology
ABSTRACT
Speculative efficiency (the ability to profit without bearing commensurate risk in foreign exchange
markets) is predicated on the forward premium anomaly.
Market efficiency still manifests itself in
the form of nonlinear adjustments, eroding excess profits.
The returns on foreign exchange
speculation may not behave in a market-efficient manner except at average values of interest-rate
differentials.
This study suggests that market efficiency holds as a result of a hedging relation
between linear and nonlinear responses of returns.
Keywords: Efficient-market hypothesis, speculative returns, hyperbolic-tangent response, hedging.
1 INTRODUCTION
mpirical evidence that contradicts anticipated economic relationships lead researchers to the exploration
of nonlinear systems.
Returns
Less
