On the persistence of the forward premium in the joint presence of nonlinearity, asymmetry, and structural changes

This paper investigates the degree of the persistence of the forward premium by simultaneously taking into account nonlinearity, asymmetry, and possible structural changes in the process. The analysis uses the multiple regime smooth transition autoregressive model, which is embedded within a nonlinear and asymmetric process, with time as the transition variable. In the model, parameters are allowed to change smoothly over time. The estimated structural change dates appear to be closely related to important economic events caused by macroeconomic shocks or changes in monetary policy. The results reveal that the persistence of the forward premium declines when nonlinearity, asymmetry, and structural changes are jointly allowed in the process. In addition, ignoring nonlinearity and asymmetry in the process tends to induce downward amplification in the persistence of the forward premium. This suggests that it is necessary to take into account all of the statistical properties of the forward premium when one measures persistence.