The Forward Exchange Rate Unbiasedness Hypothesis: A Single Break Unit Root and CointegrationAnalysis

Michael Mazur and Miguel Ramirez

No 1310, Working Papers from Trinity College, Department of Economics

Abstract: In an age of globalized finance, Forex market efficiency is particularly relevant as agents engage in arbitrage opportunities across international markets. This study tests the forward exchange rate unbiasedness hypothesis using more powerful tests such as the Zivot-Andrews single-break unit root and the KPSS stationarity (no unit root) tests to confirm that the USD/EUR spot and three-month forward rates are I(1) in nature. The study successfully employs Engle-Granger cointegration analysis which identifies a stable long-run relationship between the spot and forward rates and generates an ECM model that is used to forecast the in-sample (historical) data.The study’s findings refute past conclusions that fail to identify the data’s I(1) nature and suggests that market efficiency is present in the long run but not necessarily in the short run.

Keywords: Cointegration analysis; Error-correction model (ECM); Forward exchange rate unbiasedness hypothesis (FRUH); KPSS no unit root test; unexploited profits; and Zivot-Andrews single break unit root test (search for similar items in EconPapers)
JEL-codes: C20 C22 F3 F31 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-07
New Economics Papers: this item is included in nep-for and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www3.trincoll.edu/repec/WorkingPapers2013/WP13-10.pdf First version, 2013 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tri:wpaper:1310

Access Statistics for this paper

More papers in Working Papers from Trinity College, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Miguel Ramirez ().