A comment on: “The solution to the forward-bias puzzle”

The solution to the forward-bias puzzle: Reply

“…At that time I had not yet developed the economic theory behind my econometric solution, but I felt confident that it existed. In my replies to Baillie (2011) and King (2011) I provide the economic theory behind my econometric solution. Chang (2011) claims that my solution is "trivial" primarily for two reasons: 1 First, as discussed above, e t+1 is deterministic and therefore cannot be treated as a stochastic error term, which of course is a necessary component of a proper econometric specification.…”

“…As an example of his point, King (2011) substitutes a random variable y t for s t and another independent random variable x t for f t . He then shows in his Table 3 that his estimates of L 1 , L 2 and L 3 from Eq.…”

“….to the extent that covered interest parity is empirically valid, any restatement of its expression must, logically, be equally valid. (King (2011) Italics in the original. )…”

“…That claim provoked several comments. The editor has chosen to publish four of those comments: Baillie (2011), Chang (2011), King (2011) and Müller (2011). My reply to their comments starts with the easiest issues.…”

Pippenger's CIP-based solution to the forward-bias puzzle: A rejoinder

“…Pippenger's explanation for the forward-bias puzzle prompted several, largely critical, responses (Baillie, 2011;Chang, 2011;King, 2011;Müller, 2011) to which he has recently replied (Pippenger, 2011b). However, his defence of his model does not rebut the substance of the points raised against it.…”