Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables
AbstractThis paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing for the unbiased forward exchange rate (UFER) hypothesis. Using US/UK data, it is shown that the UFER hypothesis cannot be rejected provided that instrumental variables are used to account for within-regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based.
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Bibliographic InfoPaper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 03-15.
Length: 18 pages
Date of creation: Feb 2003
Date of revision:
Contact details of provider:
Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK
Other versions of this item:
- Martin Sola & Zacharias Psaradakis & Fabio Spagnolo, 2005. "Testing the unbiased forward exchange rate hypothesis using a Markov switching model and instrumental variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 423-437.
- fabio spagnolod & Zacharias Psaradakis & Martin Sola, 2003. "Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables," Public Policy Discussion Papers 03-15, Economics and Finance Section, School of Social Sciences, Brunel University.
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