Testing the unbiased forward exchange rate hypothesis using a Markov switching model and instrumental variables

Martin Sola (), Zacharias Psaradakis and Fabio Spagnolo
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Zacharias Psaradakis: School of Economics, Mathematics & Statistics, Birkbeck College, London, UK, Postal: School of Economics, Mathematics & Statistics, Birkbeck College, London, UK

Journal of Applied Econometrics, 2005, vol. 20, issue 3, pages 423-437

Abstract: This paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing the unbiased forward exchange rate (UFER) hypothesis. Using US|UK data, it is shown that the UFER hypothesis cannot be rejected, provided that instrumental variables are used to account for within-regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based. Copyright © 2005 John Wiley & Sons, Ltd.

Date: 2005
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Related works:
Working Paper: Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables (2003)
Working Paper: Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables (2003)
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