Efficient Estimation and Testing of Alternative Models of Currency Futures Contracts

Authors: Sequeira J.M.¹; McAleer M.²; Chow Y-F.³

Source: The Economic Record, Volume 77, Number 238, September 2001 , pp. 270-282(13)

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Abstract:

An efficient systems approach is used to estimate and test two alternative models regarding the pricing of Australian dollar futures contracts traded on the International Monetary Market of the Chicago Mercantile Exchange. Cointegrating relationships among the Australian dollar spot and futures prices, and the US and Australian risk-free rates of interest, suggest alternative error-correction representations for the cost-of-carry model which, with appropriate zero restrictions, yields the unbiased expectations hypothesis. A structural break in the futures price series permits estimation of appropriate models for the full sample in the presence of the break, for the full sample without explicitly modelling the break, and for two separate sub-samples created by the structural break. The restricted and unrestricted cost-of-carry formulations are estimated for all sample sets, the models obtained are found to be statistically adequate, and the qualitative results are reasonably robust across different sample sets for both models. On the basis of the tests of zero restrictions, the cost-of-carry model is found to be empirically superior to the unbiased expectations hypothesis for the four sample sets considered, regardless of the number of cointegrating relations.

Language: English

Document Type: Research article

Affiliations: 1: Department of Economics, University of Western Australia, and Department of Accounting and Finance, University of Melbourne 2: Department of Economics, University of Western Australia 3: Department of Finance, Chinese University of Hong Kong

Publication date: 2001-09-01