Testing the Unbiasedness Hypothesis in the Forward Foreign Exchange Market: A Specification Analysis
Thomas H. McCurdy
University of Toronto - Rotman School of Management; Center for Interuniversity Research and Analysis on Organization (CIRANO)
Journal of International Money and Finance, Vol. 3, p. 357, 1984
This paper evaluates two popular regression methods of testing the unbaisedness hypothesis in the forward foreign exchange market. For the 30-day Canada/United States forward foreign exchange market, the evidence overwhelmingly indicates that it is inappropriate to treat the structure of the systematic and stochastic components of the test relations as constant over time. Hence, conclusions inferred from parameter significance testing based upon full-sample estimation can be very misleading. Accordingly, we argue for a specification analysis of the test relation, and more explicit modeling of market fundamentals.
Number of Pages in PDF File: 12
Keywords: forward foreign exchange rate, unbiasedness hypothesis, specification tests, structural breaks
JEL Classification: C52, F31, C22Accepted Paper Series
Date posted: March 1, 2012
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