Econometric Analysis of Present Value Models When the Discount Factor Is near One
This paper develops asymptotic econometric theory to help understand data generated by a present value model with a discount factor near one. A leading application is to exchange rate models. A key assumption of the asymptotic theory is that the discount factor approaches 1 as the sample size grows. The finite sample approximation implied by the asymptotic theory is quantitatively congruent with modest departures from random walk behavior with imprecise estimation of a well-studied regression relating spot and forward exchange rates.
I thank Nonarit Bisonyabut, Roberto Duncan, Terry Iverson and Ping Yu for research assistance, and two anonymous referees, seminar audiences at Duke, the Triangle Econometrics Conference, the Far Eastern Meetings of the Econometric Society and the University of Wisconsin for helpful comments, and the National Science Foundation for financial support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
West, Kenneth D., 2012. "Econometric analysis of present value models when the discount factor is near one," Journal of Econometrics, Elsevier, vol. 171(1), pages 86-97. citation courtesy of