The Forward Rate as a Predictor of the Future Spot Rate--A Stochastic Coefficient Approach

Thomas Chiang ()

Journal of Money, Credit and Banking, 1988, vol. 20, issue 2, 212-32

Abstract: This paper develops a stochastic coefficient model to examine the unbiased forward rate hypothesis for the period January 1974 to August 1983. Tests from the full-sample estimations confirm the null hypothesis. However, the re sults from the Brown-Durbin-Evans (1975) test and the Chow test indic ate that the exchange-rate behavior departs from parameter constancy. Using joint-rolling regressions for the subsample estimations, the a uthor finds evidence that the unbiasedness hypothesis in most cases s hould be rejected and that the estimated parameters, sensitive to new information, vary through different subsample periods. The out-of-sa mple test concludes that incorporation of the stochastic properties o f the parameters into the model improves accuracy of exchange-rate pr edictions. Copyright 1988 by Ohio State University Press.

Date: 1988
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