Testing the unbiased forward exchange rate hypothesis using a Markov switching model and instrumental variables

Fabio Spagnolo, Zacharias Psaradakis and Martin Sola

Journal of Applied Econometrics, 2005, vol. 20, issue 3, 423-437

Abstract: This paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing the unbiased forward exchange rate (UFER) hypothesis. Using US/UK data, it is shown that the UFER hypothesis cannot be rejected, provided that instrumental variables are used to account for within‐regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based. Copyright © 2005 John Wiley & Sons, Ltd.

Date: 2005
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https://doi.org/10.1002/jae.773

Related works:
Journal Article: Testing the unbiased forward exchange rate hypothesis using a Markov switching model and instrumental variables (2005)
Working Paper: Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables (2003)
Working Paper: Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables (2003)
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