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dc.contributor.authorElliott, R.-
dc.contributor.authorHan, B.-
dc.identifier.citationInternational Journal of Theoretical and Applied Finance, 2006; 9(7):1009-1020-
dc.description.abstractA Hidden Markov Chain (HMC) is applied to study the forward premium puzzle. The weekly quotient of the interest rate differential divided by the log exchange rate change is modeled as a Hidden Markov process. Compared with existing standard approaches, the Hidden Markov approach allows a detailed analysis of the puzzle on a day-to-day basis while taking into full account the presence of noise in the observations. Two and three state models are investigated. A three-state HMC model performs better than two-state models. Application of the three-state model reveals that the above quotient is mostly zero, and hence leads to the rejection of the uncovered interest rate parity hypothesis.-
dc.description.statementofresponsibilityRobert J. Elliott; Bing Han-
dc.publisherWorld Scientific Publishing Co Pte Ltd-
dc.rights© 2006 World Scientific Publishing Company-
dc.subjectHidden Markov models-
dc.subjectuncovered interest rate parity.-
dc.titleA hidden Markov approach to the forward premium puzzle-
dc.typeJournal article-
Appears in Collections:Applied Mathematics publications
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