Forward Rate Bias in Developed and Developing Countries: More Risky Not Less Rational

Michael D. Goldberg, Olesia Kozlova and Deniz Ozabaci
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Michael D. Goldberg: School of Business and Economics, University of New Hampshire, 10 Garrison Avenue, Durham, NH 03824, USA
Olesia Kozlova: Capital Group, 333 South Hope Street, Los Angeles, CA 90071, USA

Econometrics, 2020, vol. 8, issue 4, 1-26

Abstract: This paper examines the stability of the Bilson–Fama regression for a panel of 55 developed and developing countries. We find multiple break points for nearly every country in our panel. Subperiod estimates of the slope coefficient show a negative bias during some time periods and a positive bias during other time periods in nearly every country. The subperiod biases display two key patterns that shed light on the literature’s linear regression findings. The results point toward the importance of risk in currency markets. We find that risk is greater for developed country markets. The evidence undercuts the widespread view that currency returns are predictable or that developed country markets are less rational.

Keywords: imperfect knowledge; Knightian Uncertainty; structural change; currency risky (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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