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Tests of Rational Expectations and No Risk Premium in Forward Exchange Markats

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  • David A. Hsieh

Abstract

This paper tests the hypothesis that traders have rational expeatations and charge no risk premium in the forward exchange market. It uses a statistical procedure which is consistent under a large class of heteroscedasticity, and a set of data which takes into account the institutional features of the forward exchange market. The results show that inferences using this procedure are very different from those using the standard assumption of homoscedasticity.

Suggested Citation

  • David A. Hsieh, 1982. "Tests of Rational Expectations and No Risk Premium in Forward Exchange Markats," NBER Working Papers 0843, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0843
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    References listed on IDEAS

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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Fama, Eugene F & Farber, Andre, 1979. "Money, Bonds, and Foreign Exchange," American Economic Review, American Economic Association, vol. 69(4), pages 639-649, September.
    3. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    4. Geweke, John F & Feige, Edgar L, 1979. "Some Joint Tests of the Efficiency of Markets for Forward Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 334-341, August.
    5. Frankel, Jeffrey A., 1979. "The diversifiability of exchange risk," Journal of International Economics, Elsevier, vol. 9(3), pages 379-393, August.
    6. Richard Meese & Kenneth J. Singleton, 1980. "Rational expectations, risk premia, and the market for spot and forward exchange," International Finance Discussion Papers 165, Board of Governors of the Federal Reserve System (U.S.).
    7. Stulz, ReneM., 1982. "The forward exchange rate and macroeconomics," Journal of International Economics, Elsevier, vol. 12(3-4), pages 285-299, May.
    8. Frenkel, Jacob A & Levich, Richard M, 1979. "Covered Interest Arbitrage and Unexploited Profits? Reply," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 418-422, April.
    9. Roll, Richard & Solnik, Bruno, 1977. "A pure foreign exchange asset pricing model," Journal of International Economics, Elsevier, vol. 7(2), pages 161-179, May.
    10. Grauer, Frederick L. A. & Litzenberger, Robert H. & Stehle, Richard E., 1976. "Sharing rules and equilibrium in an international capital market under uncertainty," Journal of Financial Economics, Elsevier, vol. 3(3), pages 233-256, June.
    11. Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 113-152, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Frankel, Jeffrey A., 1986. "The implications of mean-variance optimization for four questions in international macroeconomics," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages 53-75, March.
    2. Richard M. Levich, 1983. "Empirical Studies of Exchange Rates: Price Behavior, Rate Determinationand Market Efficiency," NBER Working Papers 1112, National Bureau of Economic Research, Inc.
    3. Gregory, Allan W. & McCurdy, Thomas H., 1984. "Testing the unbiasedness hypothesis in the forward foreign exchange market: A specification analysis," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 357-368, December.
    4. Warren J. Tease, 1988. "Speculative Efficiency and the Exchange Rate: Some Evidence Since the Float," The Economic Record, The Economic Society of Australia, vol. 64(1), pages 2-13, March.
    5. Thomas Chiang & Thomas Hindelang, 1988. "Forward rate, spot rate and risk premium: An empirical analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 124(1), pages 74-88, March.
    6. Chulho Jung & K. Doroodian & Robert Albarano, 1998. "The unbiased forward rate hypothesis: a re-examination," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 567-575.
    7. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters, in: Exchange Rate Theory and Practice, pages 121-152, National Bureau of Economic Research, Inc.
    8. Adrian W. Throop, 1994. "International financial market integration and linkages of national interest rates," Economic Review, Federal Reserve Bank of San Francisco, pages 3-18.
    9. Brian Lucey & Grace Loring, 2012. "Forward Exchange Rate Biasedness across Developed and Developing Country Currencies - Do Observed Patterns Persist Out of Sample?Abstract:," The Institute for International Integration Studies Discussion Paper Series iiisdp404, IIIS.
    10. Loring, Grace & Lucey, Brian, 2013. "An analysis of forward exchange rate biasedness across developed and developing country currencies: Do observed patterns persist out of sample?," Emerging Markets Review, Elsevier, vol. 17(C), pages 14-28.

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