The Forward Rate Unbiasedness Hypothesis Revisited: Evidence from a New Test

Natalya Delcoure, John Barkoulas (), Christopher Baum () and Atreya Chakraborty ()
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Natalya Delcoure: Louisiana Tech University

No 464, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Under conditions of risk neutrality and rational expectations in the foreign exchange market, there should be a one-to-one relationship between the forward rate and the corresponding future spot rate. However, cointegration-based tests of the unbiasedness hypothesis of the forward rate have produced mixed findings. In order to exploit significant cross-sectional dependencies, we test the unbiasedness hypothesis using a new multivariate (panel) unit-root test, the Johansen likelihood ratio (JLR) test, which offers important methodological advantages over alternative standard panel unit-root tests. When applied to a data set of eight major currencies in the post-Bretton Woods era, the JLR test provides strong and robust evidence in support of a unitary cointegrating vector between forward and corresponding future spot rates. However, the orthogonality condition is satisfied only for three major currencies.

Keywords: Forward rate unbiasedness; panel unit-root tests; cointegration (search for similar items in EconPapers)
JEL-codes: F30 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-ifn
Date: 2000-06-09
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Published 2002, Global Finance Journal, 14, 83-93.

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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:464

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