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The Dynamics and Stochastics of Currency Betas Based on the Unbiasedness Hypothesis in Foreign Exchange Markets

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  • Winston T. Lin

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

  • Hong-Jen Lin

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

  • Yueh H. Chen

    (National Sun Yat-sen University, Taiwan)

Abstract

This article examines the dynamic and stochastic behavior of the beta coefficient (to be referred to as the currency beta) of the unbiasedness hypothesis (UH) in foreign exchange markets. We argue that the dynamics and stochastics of currency betas can be attributed to the dynamic behavior of various macroeconomic variables from different sectors of an economy, in addition to the trend variable considered in previous research. Incorporating four macroeconomic variables from the financial, real, and external sectors into the currency betas of eight currencies (developed and emerging) under a logarithmic change specification used to test the UH, we attempt to simultaneously test the behavior of currency betas in terms of nonstationarity, shifts in the mean and variance, and randomness. The vast quantity of empirical tests and results strongly suggests that the changing characteristics of currency betas are readily apparent and have important implications for the reconciliation of the controversies surrounding the legitimacy of the UH, for government exchange rate policies, and for the forecasting of future spot rates, across the developed and emerging economies under study. We also find different tales from developed and developing countries.

Suggested Citation

  • Winston T. Lin & Hong-Jen Lin & Yueh H. Chen, 2002. "The Dynamics and Stochastics of Currency Betas Based on the Unbiasedness Hypothesis in Foreign Exchange Markets," Multinational Finance Journal, Multinational Finance Journal, vol. 6(3-4), pages 167-195, September.
    • Handle: RePEc:mfj:journl:v:6:y:2002:i:3-4:p:167-195
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    References listed on IDEAS

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    Cited by:

    1. Winston T. Lin, 2005. "Currency forecasting based on an error components-seemingly unrelated nonlinear regression model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(8), pages 593-605.
    2. Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2006. "The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests," The Institute for International Integration Studies Discussion Paper Series iiisdp123, IIIS.
    3. Chuang, Chia-Hung & Chiang, Chung-Yean, 2016. "Dynamic and stochastic behavior of coefficient of demand uncertainty incorporated with EOQ variables: An application in finished-goods inventory from General Motors׳ dealerships," International Journal of Production Economics, Elsevier, vol. 172(C), pages 95-109.
    4. Lin, Winston T. & Chen, Yueh H. & Hung, TingShu, 2019. "A partial adjustment valuation approach with stochastic and dynamic speeds of partial adjustment to measuring and evaluating the business value of information technology," European Journal of Operational Research, Elsevier, vol. 272(2), pages 766-779.
    5. Long, Ling & Tsui, Albert K. & Zhang, Zhaoyong, 2014. "Estimating time-varying currency betas with contagion: New evidence from developed and emerging financial markets," Japan and the World Economy, Elsevier, vol. 30(C), pages 10-24.
    6. 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.
    7. Jayasinghe, Prabhath & Tsui, Albert K. & Zhang, Zhaoyong, 2014. "New estimates of time-varying currency betas: A trivariate BEKK approach," Economic Modelling, Elsevier, vol. 42(C), pages 128-139.

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    More about this item

    Keywords

    four-step generalized; logarithmic change specification; macroeconomic variables; unbiasedness hypothesis; variable mean response;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • 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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