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Term Effects and the Time-Varying Risk Premium in Tests of Forward Foreign Exchange Rate Unbiasedness

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  • Breuer, Janice Boucher

Abstract

The term (or number of days) until a 1-month forward contract is delivered may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These term effects arise because a 1-month forward contract is not equal to a pre-specified number of days and, thus, the risk of valuation changes over the life of the contract depend on the contract's exact term. The term effect is consistent with a time-varying risk premium. However, empirical results provide no evidence of a term effect and so other explanations must be considered. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Breuer, Janice Boucher, 2000. "Term Effects and the Time-Varying Risk Premium in Tests of Forward Foreign Exchange Rate Unbiasedness," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(3), pages 211-220, July.
  • Handle: RePEc:ijf:ijfiec:v:5:y:2000:i:3:p:211-20
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    Cited by:

    1. Frankel, Jeffrey & Poonawala, Jumana, 2010. "The forward market in emerging currencies: Less biased than in major currencies," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 585-598, April.
    2. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.

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