Using the Kalman filter, we obtain maximum likelihood estimates of a permanent-transitory components model for log spot and forward dollar prices of the pound, the franc, and the yen. This simple parametric model is useful in understanding why the forward rate may be an unbiased predictor of the...

The authors examine the ability of the standard intertemporal asset pricing model and a model of noise trading to explain why the forward foreign exchange premium predicts the future currency depreciation with the 'wrong' sign. They find that the intertemporal asset pricing model is unable to...