Unbiasedness of the Forward Exchange Rates

Gurdip S Bakshi and Atsuyuki Naka

The Financial Review, 1997, vol. 32, issue 1, 145-62

Abstract: This paper derives an error correction model under the assumption that the spot and the forward rates are cointegrated, the first difference of forward rates is stationary, and the first order autocorrelation in the forecast error is allowed. When tests of the unbiasedness hypothesis are conducted with an error correction model using generalized methods of moments (GMM), the unbiasedness hypothesis cannot be rejected. Furthermore, the multivariate GMM estimation supports the hypothesis of unbiasedness of the forward exchange rates and the absence of a risk premium in the foreign exchange markets. Copyright 1997 by MIT Press.

Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:32:y:1997:i:1:p:145-62

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