Exchange rate uncertainty and the efficiency of the forward market for foreign exchange

Exchange Rate Uncertainty and the Efficiency of the Forward Market for Foreign Exchange. — The paper investigates to what extent exchange rate uncertainty can account for the observed deviations from the forward market efficiency hypothesis (FMEH). The empirical analysis employs a simple varying parameter regression to allow uncertainty to modify the central parameters of the FMEH in a direct way. Uncertainty is proxied by significant exchange rate changes. The results indicate that there is considerable support for the FMEH if one allows the intercept term to vary over time.