Abstract
It has been investigated; the relationship between the spot and the forward rate in a fractionally cointegrated framework based on Geweke and Porter-Hudak test and fractional error correction mechanism (Davidson:2002,2005). Using EUR/YTL data, we found that fractional integration exist for narrowed FRUH model (as st+1, ft) where fractional integration doesn’t exist for FRUH model(as st+1-st, ft-st) based on GPH test. Although standard cointegration test(Johansen procedure) and Engle-Granger ADF test support general cointegration between the spot and the forward rate, fractional cointegration is not determined for TurkDex and thus support that the spot and the forward rate are integrated with different order of integration(I(d1) and I(d2)). Since FRUH doesn’t exist there would be arbitrage profit in TurkDex. Although is found statistically significant, is found insignificant in fruh. Besides, low value of proved weaken Fruh for TurkDex. We also find that the direction of causality runs from the spot to the forward rate for FRUH model(as st+1-st, ft-st) and this also support the existence of a foreign exchange risk premium and weak derivatives market for euro exchange rate in selected time period.
| Original language | English |
|---|---|
| Title of host publication | Symposium was held in the Istanbul Stock Exchange with the contributions of Marmara University Banking and Insurance Institute and Vienna University of Economics and Business Administration |
| Publisher | Beta Publications |
| Pages | p. 545-568 |
| Publication status | Published - May 2006 |
Keywords
- Unbiased forward exchange rate, fractional cointegration, fractional error correction