Question
Can anyone answer the following questions? Suppose the forward expectation parity does not hold. In other words, the forward premium is not really equal to
Can anyone answer the following questions?
Suppose the forward expectation parity does not hold. In other words, the forward premium is not really equal to the expected rate of appreciation. Then, we can write the forward premium as the expected rate of appreciation plus a remainder term. If you regress the expected rate of appreciation on the forward premium, what does a negative beta (slope coefficient) imply about the magnitude of variance of the remainder term relative to the magnitude of variance of expected rate of appreciation? Which one is larger, or they are equal to each other?
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