The Forward Rate Unbiasedness Hypothesis Revisited: Evidence from a New Test
AbstractUnder 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, 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.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 464.
Length: 19 pages
Date of creation: 09 Jun 2000
Date of revision:
Publication status: Published 2002, Global Finance Journal, 14, 83-93.
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
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Forward rate unbiasedness; panel unit-root tests; cointegration;
Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-06-29 (All new papers)
- NEP-FMK-2000-06-29 (Financial Markets)
- NEP-IFN-2000-06-29 (International Finance)
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