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Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies

Author

Listed:
  • Raj Aggarwal

    (University of Akron, U.S.A.)

  • Winston T. Lin

    (The State University of New York at Buffalo, U.S.A.)

  • Sunil K. Mohanty

    (University of St. Thomas, Minneapolis, U.S.A.)

Abstract

It has been suggested that prior studies that have puzzlingly found forward rates to be inefficient and biased forecasts of future spot rates may be limited by inadequate statistical methodologies. Using an improved statistical methodology that accounts for both non-stationarity and non-normality in exchange rates, we unfortunately reconfirm that U.S. dollar forward rates for horizons ranging from one to twelve months for the British pound, Japanese yen, Swiss franc, and the German mark over the period 1973–1998 are generally not efficient or rational forecasts of future spot rates. However, as one bright spot, we cannot reject efficiency and rationality for the U.S. dollar forward rate for the Canadian dollar.

Suggested Citation

  • Raj Aggarwal & Winston T. Lin & Sunil K. Mohanty, 2008. "Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies," Multinational Finance Journal, Multinational Finance Journal, vol. 12(1-2), pages 1-20, March-Jun.
    • Handle: RePEc:mfj:journl:v:12:y:2008:i:1-2:p:1-20
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    References listed on IDEAS

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    More about this item

    Keywords

    forward rates; rational forecasts;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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