Why is the Foreward Exchange Rate Forecast Based? A Survey of Recent Evidence
AbstractForward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward premium. Properties of the expected forward forecast error are reviewed. Issues such as the relation of uncovered interest parity to real interest parity, and the implications of uncovered interest parity for cointegration of various quantities are discussed. The modeling and testing for risk premiums is surveyed. Included in this area are tests of the consumption CAPM, tests of the latent variable model, and portfolio-balance models of risk premiums. General equilibrium models of the risk premium are examined and their empirical implications explored. The survey does not cover the important areas of learning and peso problems, tests of rational expectations based on survey data, or the models of irrational expectations and speculative bubbles.
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Bibliographic InfoPaper provided by University of Washington, Department of Economics in its series Working Papers with number 95-08.
Length: 113 pages
Date of creation: 1995
Date of revision:
exchange rate ; central banks;
Other versions of this item:
- Engel, C., 1995. "Why is the Foreward Exchange Rate Forecast Based? A Survey of Recent Evidence," Discussion Papers in Economics at the University of Washington 95-08, Department of Economics at the University of Washington.
- Charles Engel, 1995. "Why is the forward exchange rate forecast biased? A survey of recent evidence," Research Working Paper 95-06, Federal Reserve Bank of Kansas City.
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- Landon, Stuart & Smith, Constance, 1999.
"The risk premium, exchange rate expectations, and the forward exchange rate: Estimates for the Yen-Dollar rate,"
9775, University Library of Munich, Germany.
- Stuart Landon & Constance E. Smith, 2003. "The Risk Premium, Exchange Rate Expectations, and the Forward Exchange Rate: Estimates for the Yen--Dollar Rate," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 144-158, February.
- Cem Karacadag & Roberto Pereira GuimarÃ£es, 2004. "The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey," IMF Working Papers 04/123, International Monetary Fund.
- Hodrick, Robert J & Vassalou, Maria, 2001. "Do We Need Multi-Country Models to Explain Exchange Rate, Interest Rate and Bond Return Dynamics?," CEPR Discussion Papers 3056, C.E.P.R. Discussion Papers.
- Richards, Anthony J., 1995.
"Comovements in national stock market returns: Evidence of predictability, but not cointegration,"
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Elsevier, vol. 36(3), pages 631-654, December.
- Anthony J. Richards, 1996. "Comovements in National Stock Market Returns: Evidence of Predictability but not Cointegration," IMF Working Papers 96/28, International Monetary Fund.
- Roberto Guimaraes & Cem Karacadag, 2005. "The Empirics of Foreign Exchange Intervention in Emerging Market Countries The Cases of Mexico and Turkey," Money Macro and Finance (MMF) Research Group Conference 2005 68, Money Macro and Finance Research Group.
- Christopher J. Neely, 1997. "Technical analysis in the foreign exchange market: a layman's guide," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-38.
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