Re-examining forward market efficiency Evidence from fractional and Harris-Inder cointegration tests |
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Authors: | Taufiq Choudhry |
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Institution: | a Southampton Management School, University of Southampton, Southampton SO17 1BJ, UK |
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Abstract: | This article investigates the forward market efficiency by testing the unbiased forward exchange rate hypothesis using nine currencies vis-à-vis the U.S. dollar. The empirical tests are conducted using monthly data during the period between January 1985 and December 1996 and two different methods of cointegration tests, a fractional (GPH) test and the Harris-Inder test. The two cointegration tests are based on two different null hypotheses. Results provide ample evidence of cointegration between the spot and the forward rate, but little evidence of the unbiased rate hypothesis, which may be due to the nonstationary risk premium. |
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Keywords: | Cointegration ARFIMA Mean-reversion Forward premium |
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