Testing the unbiasedness hypothesis of foreign exchange rates and the analysis of transformations |
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Authors: | Albert A Okunade H Haryanto Dwight B Means Jr |
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Institution: | (1) Department of Economics, The University of Memphis, 400BB (FCBE), 38152 Memphis, TN, USA;(2) Department of Finance, The University of Memphis, 402BB (FCBE), 38152 Memphis, TN, USA |
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Abstract: | Recent researchers have utilized various functional forms for testing the hypothesis that the forward rate is an unbiased predictor of future spot rates in foreign exchange markets. We compare a large number of these functional forms for a similar time period and test their consistency with the data for five major currencies. Our results imply that certain functional form models may be inappropriate for some currencies. Researchers must, therefore, be cautious of misspecification due to erroneous functional forms when testing the unbiased forward rate hypothesis. |
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Keywords: | foreign exchange rate functional forms transformation forward rate spot rate |
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