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The Forward Rate Unbiasedness Hypothesis Revisited: Evidence from a New Test

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Author Info

  • Natalya Delcoure

    (Louisiana Tech University)

  • John T. Barkoulas

    () (University of Tennessee)

  • Christopher F. Baum

    () (Boston College, DIW Berlin)

  • Atreya Chakraborty

    (University of Massachusetts-Boston)

Abstract

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, 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 Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 464.

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Length: 19 pages
Date of creation: 09 Jun 2000
Date of revision:
Publication status: Published 2002, Global Finance Journal, 14, 83-93.
Handle: RePEc:boc:bocoec:464

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Keywords: Forward rate unbiasedness; panel unit-root tests; cointegration;

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References

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Cited by:
  1. Sofiane Sekioua, 2004. "The forward unbiasedness hypothesis and the forward premium: a nonlinear analysis," Money Macro and Finance (MMF) Research Group Conference 2003 85, Money Macro and Finance Research Group.
  2. 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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