The forward rate unbiasedness hypothesis reexamined: Evidence from a new test

1 p.

Under conditions of risk neutrality and rational expectations in the foreign exchange market, there should be a one-to-one relationship between the forward rate and the corresponding future spot rate. However, a cointegration-based tests of the unbiasedness hypothesis of the forward rate have produced mixed findings. In order to exploit significant cross-sectional dependencies, we test the unbiasedness hypothesis using a new multivariate (panel) unit-root test, the Johansen likelihood ratio (JLR) test, which offers important methodological advantages over alternative standard panel unit-root tests. When applied to a data set of eight major currencies in the post-Bretton Woods era, the JLR test provides strong and robust evidence in support of a unitary cointegrating vector between forward and corresponding future spot rates. However, the orthogonality condition is satisfied only for three major currencies. [PUBLICATION ABSTRACT]

bias, cointegration analysis, foreign exchange rates, Forward exchange, hypotheses, studies

Английский

Global Finance Journal. – 2003. – Vol. 14, № 1. – P. 83–93.