TY - BOOK ID - 84542578 TI - Nonlinearity in Deviations From Uncovered Interest Parity : An Explanation of the Forward Bias Puzzle AU - Valente, Giorgio. AU - Leon, Gene. AU - Sarno, Lucio. PY - 2006 SN - 146238613X 1452761248 1283512890 1452700354 9786613825346 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Banks and Banking KW - Foreign Exchange KW - Money and Monetary Policy KW - Time-Series Models KW - Dynamic Quantile Regressions KW - Dynamic Treatment Effect Models KW - Diffusion Processes KW - Interest Rates: Determination, Term Structure, and Effects KW - Monetary Systems KW - Standards KW - Regimes KW - Government and the Monetary System KW - Payment Systems KW - Currency KW - Foreign exchange KW - Finance KW - Monetary economics KW - Interest rate parity KW - Exchange rates KW - Forward exchange rates KW - Spot exchange rates KW - Currencies KW - Financial services KW - Money KW - Interest rates KW - United Kingdom UR - https://www.unicat.be/uniCat?func=search&query=sysid:84542578 AB - We provide empirical evidence that deviations from uncovered interest rate parity (UIP) display significant nonlinearities, consistent with theories based on transaction costs or limits to speculation. This evidence suggests that the forward bias documented in the literature may be less indicative of major market inefficiencies than previously thought. Monte Carlo experiments allow us to reconcile these results with the large empirical literature on the forward bias puzzle since we show that, if the true process of UIP deviations were of the nonlinear form we consider, estimation of conventional spot-forward regressions would generate the anomalies documented in previous research. ER -