Unbiasedness of the Forward Exchange Rates
AbstractThis paper derives an error correction model under the assumption that the spot and the forward rates are cointegrated, the first difference of forward rates is stationary, and the first order autocorrelation in the forecast error is allowed. When tests of the unbiasedness hypothesis are conducted with an error correction model using generalized methods of moments (GMM), the unbiasedness hypothesis cannot be rejected. Furthermore, the multivariate GMM estimation supports the hypothesis of unbiasedness of the forward exchange rates and the absence of a risk premium in the foreign exchange markets. Copyright 1997 by MIT Press.
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Bibliographic InfoArticle provided by Eastern Finance Association in its journal The Financial Review.
Volume (Year): 32 (1997)
Issue (Month): 1 (February)
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- Bali, Turan G. & Wu, Liuren, 2010. "The role of exchange rates in intertemporal risk-return relations," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1670-1686, December.
- Ram Bhar & Carl Chiarella & Toan Pham, 2000. "Modeling the Currency Forward Risk Premium: Theory and Evidence," Research Paper Series 41, Quantitative Finance Research Centre, University of Technology, Sydney.
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- Lothian, James R. & Wu, Liuren, 2011. "Uncovered interest-rate parity over the past two centuries," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 448-473, April.
- Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2006. "The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests," The Institute for International Integration Studies Discussion Paper Series iiisdp123, IIIS.
- Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, January.
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