Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased:
$S_{t}=a_{0}+a_{1} F_{t}-1+\mu t$ ,
where St is the spot rate of the yen in year t and F_t - 1 is the forward rate of the yen in year t - 1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate.

Question

Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased:

S_{t}=a_{0}+a_{1} F_{t}-1+\mu t

,
where St is the spot rate of the yen in year t and F_t - 1 is the forward rate of the yen in year t - 1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate.

Quizplus · Accepted Answer

The coefficient of a₁ = 0.30 indicates that for every 1% increase in the forward rate, the spot rate increased by only 0.30%. This means that the forecasts were overestimating the actual spot rate, as the actual increase was less than what was predicted.

Leila Corp St=a0+a1Ft−1+μt S_{t}=a_{0}+a_{1} F_{t}-1+\mu t St​=a0​+a1​Ft​−1+μt , Where St Is the Spot Rate of the the Forecasts

Leila Corp $S_{t}=a_{0}+a_{1} F_{t}-1+\mu t$ ,
Where St Is the Spot Rate of the the Forecasts