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The Forward Rate as a Predictor of the Future Spot Rate--A Stochastic Coefficient Approach

Listed author(s):
  • Chiang, Thomas C

This paper develops a stochastic coefficient model to examine the unbiased forward rate hypothesis for the period January 1974 to August 1983. Tests from the full-sample estimations confirm the null hypothesis. However, the re sults from the Brown-Durbin-Evans (1975) test and the Chow test indic ate that the exchange-rate behavior departs from parameter constancy. Using joint-rolling regressions for the subsample estimations, the a uthor finds evidence that the unbiasedness hypothesis in most cases s hould be rejected and that the estimated parameters, sensitive to new information, vary through different subsample periods. The out-of-sa mple test concludes that incorporation of the stochastic properties o f the parameters into the model improves accuracy of exchange-rate pr edictions. Copyright 1988 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 20 (1988)
Issue (Month): 2 (May)
Pages: 212-232

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Handle: RePEc:mcb:jmoncb:v:20:y:1988:i:2:p:212-32
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