Testing Forward Exchange Rate Unbiasedness Efficiently: A Semiparametric Approach

Journal of Applied Economics, Vol. 7, No. I, pp. 325-353, 2004

Posted: 28 Feb 2005

See all articles by Douglas J. Hodgson

Douglas J. Hodgson

University of Quebec at Montreal (UQAM) - Department of Economics

Oliver B. Linton

University of Cambridge

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Abstract

We apply semiparametric efficient estimation procedures for a seemingly unrelated regression model where the multivariate error density is elliptically symmetric to study the efficiency of the foreign exchange market. We consider both cointegrating regressions and standard stationary regressions. The elliptical symmetry assumption allows us to avoid the curse of dimensionality problem that typically arises in multivariate semiparametric estimation procedures, because the multivariate elliptically symmetric density function can be written as a function of a scalar transformation of the observed multivariate data. We test the unbiasedness hypothesis on both weekly and daily exchange rate data and strongly reject unbiasedness at the weekly horizon, but fail to reject the unbiasedness hypothesis on the daily data. Estimates of the semiparametric procedure in some cases differ substantially from traditional OLS estimates.

Keywords: forward exchange market, time series econometrics, nonparametric statistics

JEL Classification: C22

Suggested Citation

Hodgson, Douglas J. and Linton, Oliver B. and Vorkink, Keith, Testing Forward Exchange Rate Unbiasedness Efficiently: A Semiparametric Approach. Journal of Applied Economics, Vol. 7, No. I, pp. 325-353, 2004. Available at SSRN: https://ssrn.com/abstract=673761

Douglas J. Hodgson (Contact Author)

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

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