The long memory of the forward premium

Abstract

The estimation of ARFIMA models by approximate maximum likelihood estimation methods, reveals the forward premia for the currencies of Canada, Germany and the UK vis-à-vis the US dollar, to be well described by a fractionally integrated process. These models imply that all the forward premia are mean reverting, although their autocorrelations are quite persistent. This degree of persistence has led other studies to erroneously conclude that the forward premia contains a unit root. (JEL C22, E31).