Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased:
S_t = a₀ + a₁F_t _- ₁ + $\mu$ _t,

Where S_t 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 = a₀ + a₁F_t _- ₁ +

\mu

_t,

Where S_t 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 for the forward rate term is positive, indicating that the forecasts have consistently underestimated the realized spot rate. Therefore, the answer is choice B, "underestimated."

Leila Corp μ\muμ t, ​ Where St Is the Spot Rate of the the Forecasts

Leila Corp $\mu$ _t,

Where S_t Is the Spot Rate of the the Forecasts