Testing the unbiasedness hypothesis in the forward foreign exchange market: A specification analysis |
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Authors: | Allan W Gregory |
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Institution: | Department of Economics, University of Western Ontario, London, Ont., Canada N6A 5C2;Department of Economics, Queen''s University, Kingston, Ont., Canada K7L 3N6 |
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Abstract: | This paper evaluates two popular regression methods of testing the unbiasedness hypothesis in the forward foreign exchange market. For the 30-day Canada/United States forward foreign exchange market, the evidence overwhelmingly indicates that it is inappropriate to treat the structure of the systematic and stochastic components of the test relations as constant over time. Hence, conclusions inferred from parameter significance testing based upon full-sample estimation can be very misleading. Accordingly, we argue for a specification analysis of the test relations, and more explicit modelling of market fundamentals. |
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