Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies

Raj Aggarwal, Winston T. Lin and Sunil K. Mohanty
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Winston T. Lin: The State University of New York at Buffalo, U.S.A.
Sunil K. Mohanty: University of St. Thomas, Minneapolis, U.S.A.

Multinational Finance Journal, 2008, vol. 12, issue 1-2, 1-20

Abstract: It has been suggested that prior studies that have puzzlingly found forward rates to be inefficient and biased forecasts of future spot rates may be limited by inadequate statistical methodologies. Using an improved statistical methodology that accounts for both non-stationarity and non-normality in exchange rates, we unfortunately reconfirm that U.S. dollar forward rates for horizons ranging from one to twelve months for the British pound, Japanese yen, Swiss franc, and the German mark over the period 1973–1998 are generally not efficient or rational forecasts of future spot rates. However, as one bright spot, we cannot reject efficiency and rationality for the U.S. dollar forward rate for the Canadian dollar.

Keywords: forward rates; rational forecasts (search for similar items in EconPapers)
JEL-codes: F31 F47 G14 G15 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:mfj:journl:v:12:y:2008:i:1-2:p:1-20

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