Unit root and cointegration tests on the efficiency and biasedness of forward exchange rates |
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Authors: | C S Pyun Richard D Evans |
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Institution: | 1. Memphis State University, 38152, Memphis, TN
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Abstract: | This paper analyzes the stationarity of spot and forward exchange rates by testing for the presence of unit roots in the autoregressive
process of the exchange rate time series. The results of the unit root and cointegration tests for forward exchange rates
of six major currencies are inconsistent with earlier studies by others that found the existence of unit roots but the absence
of cointegration. Our results show that realized spot rates are cointegrated with past forward rates. Both Dickey-Fuller and
Augmented Dickey-Fuller tests affirm the unbiased forward rate hypothesis for 30- and 90-day forward rates. The Augmented
Dickey-Fuller tests on the longer term forward rate, however, reveal the existence of cointegration that leads to the rejection
of the hypothesis. |
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