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The Forward Exchange Rate Bias Puzzle is Persistent: Evidence from Stochastic and Nonparametric Cointegration TestsRaj AggarwalUniversity of Akron - Department of Finance Brian M. LuceyTrinity College, Dublin - School of Business; University of Dublin - Institute for International Integration Studies (IIIS); Glasgow Caledonian University - Division of Accounting & Finance Sunil MohantyUniversity of St. Thomas (Minnesota) - Opus College of Business Financial Review, Vol. 44, Issue 4, pp. 625-645, November 2009 Abstract: An important puzzle in international finance is the failure of the forward exchange rate to be a rational forecast of the future spot rate. We document that even after accounting for nonstationarity, nonnormality, and heteroskedasticity using parametric and nonparametric tests on data for over a quarter century, U.S. dollar forward rates for the major currencies (the British pound, Japanese yen, Swiss franc, and the German mark) are generally not rational forecasts of future spot rates. These findings deepen the forward exchange rate bias puzzle, especially as these markets are the most liquid foreign exchange markets with very low trading costs.
Number of Pages in PDF File: 21 Accepted Paper SeriesDate posted: October 14, 2009Suggested CitationContact Information
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