Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies

20 Pages Posted: 26 Jun 2015

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Winston Lin

SUNY at Buffalo - School of Management

Sunil Mohanty

University of St. Thomas - Opus College of Business

Date Written: June 26, 2015

Abstract

It has been suggested that prior studies that have puzzlingly found forward rates to be inefficient and biased forecasts of future spot rates may be limited by inadequate statistical methodologies. Using an improved statistical methodology that accounts for both non-stationarity and non-normality in exchange rates, we unfortunately reconfirm that U.S. dollar forward rates for horizons ranging from one to twelve months for the British pound, Japanese yen, Swiss franc, and the German mark over the period 1973-1998 are generally not efficient or rational forecasts of future spot rates. However, as one bright spot, we cannot reject efficiency and rationality for the U.S. dollar forward rate for the Canadian dollar.

Keywords: forward rates; rational forecasts

JEL Classification: F31, G14, F47, G15

Suggested Citation

Aggarwal, Raj and Lin, Winston T. and Mohanty, Sunil K., Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies (June 26, 2015). Multinational Finance Journal, Vol. 12, No. 1/2, p. 1-20, 2008. Available at SSRN: https://ssrn.com/abstract=2623425

Raj Aggarwal (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Winston T. Lin

SUNY at Buffalo - School of Management ( email )

325A Jacobs Management Center
Buffalo, NY 14260
United States
716-645-3245 (Phone)
716-645-6117 (Fax)

Sunil K. Mohanty

University of St. Thomas - Opus College of Business ( email )

1000 LaSalle Avenue
TMH 443
Minneapolis, MN 55403
United States

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