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6.1. DEVIATIONS FROM UIP 165yen, and deutschemark. The dependent variable is the realized forwardcontract proÞt, which is regressed on the own and cross forward premia.The 350 monthly observations are formed by taking observations fromevery fourth Friday. From March 1973 to December 1991, the dataare from the Harris Bank Foreign Exchange Weekly Review extendingfrom March 1973 to December 1991. From 1992 to 1999, the data ⇐(107)are from Datastream. The Wald test that the slope coefficients arejointly zero with p-values are given in Table 6.1. The Wald statisticsare asymptotically χ 2 3 under the null hypothesis. Two versions of theasymptotic covariance matrix are estimated. Newey and West with 6lags (denoted Wald(NW[6])), and Hansen-Hodrick with 2 lags (denotedWald(HH[2])). In these data, UIP is rejected at reasonable levels ofsigniÞcance for every currency except for the dollar-deutschemark rate.Table 6.1: Hansen-Hodrick tests of UIPUS-BP US-JY US-DM DM-BP DM-JY BP-JYWald(NW[6]) 16.23 400.47 5.701 66.77 46.35 294.31p-value 0.001 0.000 0.127 0.000 0.000 0.000Wald(HH[2]) 16.44 324.85 4.299 57.81 32.73 300.24p-value 0.001 0.000 0.231 0.000 0.000 0.000Notes: Regression s t −f t−3,3 = z 0 t−3 β +² t,3 estimated on monthly observations from1973,3 to 1999,12. Wald is the Wald statistic for the test that β = 0. Asymptoticcovariance matrix estimated by Newey-West with 6 lags (NW[6]) and by Hansen—Hodrick with 2 lags (HH[2]).The Advantage of Using Overlapping ObservationsThe Hansen—Hodrick correction involves some extra work. Are the beneÞtsobtained by using the extra observations worth the extra costs?Afterall, you can avoid inducing the serial correlation into the regressionerror by using nonoverlapping quarterly observations but then youwould only have 111 data points. Using the overlapping monthly observationsincreases the nominal sample size by a factor of 3 but theeffective increase in sample size may be less than this if the additionalobservations are highly dependent.