Noninformative Tests of the Unbiased Forward Exchange Rate
Scott W. Barnhart
Florida Atlantic University
Robert F. McNown
University of Colorado at Boulder - Department of Economics
Myles S. Wallace
Clemson University - John E. Walker Department of Economics
Journal of Financial and Quantitative Analysis, June 1999
In this paper a familiar, but unsettling result in the foreign exchange literature is reexamined: that the forward rate is not an unbiased predictor of the future spot rate. The paper outlines why some frequently used tests of unbiasedness are noninformative in the sense that they are incapable of correctly testing the hypothesis. Specifically, many of these tests are based on regressions that suffer from simultaneity bias, resulting in biased and inconsistent estimators. This is true whether the tests are conducted using stationary or nonstationary data. This point is demonstrated both analytically and with simulations. Tests of cointegration, which are not subject to the critique presented in the paper, generally fail to reject unbiasedness.
Number of Pages in PDF File: 28
JEL Classification: F31, G12Accepted Paper Series
Date posted: April 19, 1999 ; Last revised: October 6, 2009
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