An analysis of the unbiased forward rate hypothesis in developed and emerging economies
Muka Phungo and
Lumengo Bonga-Bonga ()
MPRA Paper from University Library of Munich, Germany
This study assesses whether the unbiased forward rate hypothesis (UFRH) holds in its strong or weak form in selected developed and emerging economies. Moreover, the paper assesses whether this hypothesis, or the relationship between the forward and spot exchange rates, is better specified by a linear or nonlinear model. The paper makes use of the smooth transition error correction model (STECM) to account for long-run relationship and asymmetric adjustment between the two exchange rates. The results of the empirical analysis show the possibility of nonlinear cointegration between the spot and forward exchange rates in a number of developed and emerging economies. In addition, the results reveal that the magnitude of the speed of adjustment to cancel arbitrage opportunities is higher in emerging than in developed markets. This occurs because the size of arbitrage profit is higher in emerging markets compared to developed markets
Keywords: forward market; spot market; exchange rate; unbiased forward rate hypothesis; smooth transition error correction model (search for similar items in EconPapers)
JEL-codes: C50 G14 G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:92222
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