The Forward Rate Unbiasedness Hypothesis Revisited
Abstract
It is widely accepted that long-term interest rates are more suitable for testing the Uncovered Interest Rate Parity (UIP) than shorter-term rates. This paper shows that while using longer-term (1-year) forward exchange rates are also more suitable than shorter-term rates (1-month) for testing the forward exchange rate unbiasedness hypothesis (FRUH) the test is sensitive to the choice of the numeraire currency, i.e. the US dollar, the Deutsche mark (DM) or the Japanese yen. The FRUH holds in currencies measured in terms of the US dollar when a one-year forward contract is used instead of a one-month contract, but it does not hold when the DM and the yen are used as numeraire currencies. Copyright @ 2002 by John Wiley & Sons, Ltd. All rights reserved.Download Info
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Bibliographic Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.
Volume (Year): 7 (2002)
Issue (Month): 4 (October)
Pages: 293-308
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Handle: RePEc:ijf:ijfiec:v:7:y:2002:i:4:p:293-308
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Alfred Guender & Bevan Cook, 2010.
"Monetary policy implementation and uncovered interest parity: empirical evidence from Oceania,"
Working Papers in Economics
10/71, University of Canterbury, Department of Economics and Finance.
- Alfred Guender & Bevan Cook, 2010. "Monetary policy implementation and uncovered interest parity: empirical evidence from Oceania," Reserve Bank of New Zealand Discussion Paper Series DP2010/12, Reserve Bank of New Zealand.
- Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics 06/16, University of Waikato, Department of Economics.
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