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The Forward Exchange Rate Bias Puzzle Is Persistent: Evidence from Stochastic and Nonparametric Cointegration Tests


  • Raj Aggarwal
  • Brian M. Lucey
  • Sunil K. Mohanty


An important puzzle in international finance is the failure of the forward exchange rate to be a rational forecast of the future spot rate. We document that even after accounting for nonstationarity, nonnormality, and heteroskedasticity using parametric and nonparametric tests on data for over a quarter century, U.S. dollar forward rates for the major currencies (the British pound, Japanese yen, Swiss franc, and the German mark) are generally not rational forecasts of future spot rates. These findings deepen the forward exchange rate bias puzzle, especially as these markets are the most liquid foreign exchange markets with very low trading costs. Copyright (c) 2009, The Eastern Finance Association.

Suggested Citation

  • Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2009. "The Forward Exchange Rate Bias Puzzle Is Persistent: Evidence from Stochastic and Nonparametric Cointegration Tests," The Financial Review, Eastern Finance Association, vol. 44(4), pages 625-645, November.
  • Handle: RePEc:bla:finrev:v:44:y:2009:i:4:p:625-645

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    References listed on IDEAS

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    Cited by:

    1. Pippenger, John, 2017. "Forward Bias, The Failure Of Uncovered Interest Parity And Related Puzzles," University of California at Santa Barbara, Economics Working Paper Series qt2ff194s2, Department of Economics, UC Santa Barbara.
    2. 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.
    3. 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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