Term Effects and the Time-Varying Risk Premium in Tests of Forward Foreign Exchange Rate Unbiasedness
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.
Volume (Year): 5 (2000)
Issue (Month): 3 (July)
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