Day-of-Week Effects in Tests of Forward Foreign Exchange Rate Unbiasedness

Janice Boucher Breuer
Authors registered in the RePEc Author Service: Janice Breuer Bass

International Journal of Finance & Economics, 1999, vol. 4, issue 3, 193-204

Abstract: The day of the week on which the forward rate is quoted and the day of the week on which the corresponding one-period ahead spot rate matched to the delivery date of the forward contract is quoted may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These "day-of-week" effects are motivated from an inventory carrying cost argument as in Bessembinder (1994) and introduced into a simple model for forward foreign exchange market efficiency. Empirical results show that the point estimates are generally consistent with the hypotheses; however, large standard errors make discriminatory power weak and conclusions regarding the role of inventory carrying costs in the magnitude of the forward premium bias debatable. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.

Date: 1999
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