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The Road Less Travelled: Institutional Aspects of Data and Their Influence on Empirical Estimates with an Application to Tests of Forward Rate Unbiasedness

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  • Breuer, Janice Boucher
  • Wohar, Mark E

Abstract

The difference between data used in empirical studies and that envisioned in the theory can influence empirical estimates, sometimes by enough that the direction of future research is altered. This paper illustrates how, in the context of tests of forward rate unbiasedness, a lack of articulation about the mechanics underlying foreign exchange market speculation and about the institutional aspects governing spot and forward rate contracts leads to sampling of the data in a way that is not consistent with the theory. The authors find that the sampling problems account for some but not all of the bias in the coefficient on the forward premium. Copyright 1996 by Royal Economic Society.

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  • Breuer, Janice Boucher & Wohar, Mark E, 1996. "The Road Less Travelled: Institutional Aspects of Data and Their Influence on Empirical Estimates with an Application to Tests of Forward Rate Unbiasedness," Economic Journal, Royal Economic Society, vol. 106(434), pages 26-38, January.
    • Handle: RePEc:ecj:econjl:v:106:y:1996:i:434:p:26-38
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    Cited by:

    1. Frankel, Jeffrey & Poonawala, Jumana, 2010. "The forward market in emerging currencies: Less biased than in major currencies," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 585-598, April.
    2. Zhou, Su & Kutan, Ali M., 2005. "Does the forward premium anomaly depend on the sample period used or on the sign of the premium?," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 17-25.
    3. Ligeralde, Antonio V., 1997. "Covariance matrix estimators and tests of market efficiency," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 323-343, April.
    4. Campa, Jose Manuel & Chang, P. H. Kevin, 1998. "The forecasting ability of correlations implied in foreign exchange options," Journal of International Money and Finance, Elsevier, vol. 17(6), pages 855-880, December.
    5. repec:osu:osuewp:014 is not listed on IDEAS
    6. Zhao, Yanping & de Haan, Jakob & Scholtens, Bert & Yang, Haizhen, 2013. "The relationship between the Renminbi future spot return and the forward discount rate," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 156-168.
    7. Stuart Landon & Constance E. Smith, 2003. "The Risk Premium, Exchange Rate Expectations, and the Forward Exchange Rate: Estimates for the Yen–Dollar Rate," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 144-158, February.
    8. Zhou, Su & Kutan, Ali M., 2002. "Is there asymmetry in forward exchange rate bias? Multi-country evidence," ZEI Working Papers B 06-2002, University of Bonn, ZEI - Center for European Integration Studies.
    9. Mark, Nelson C & Wu, Yangru, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Economic Journal, Royal Economic Society, vol. 108(451), pages 1686-1706, November.
    10. Zhou, Su, 2002. "The forward premium anomaly and the trend behavior of the exchange rates," Economics Letters, Elsevier, vol. 76(2), pages 273-279, July.
    11. Chong, James, 2005. "The forecasting abilities of implied and econometric variance-covariance models across financial measures," Journal of Economics and Business, Elsevier, vol. 57(5), pages 463-490.
    12. Ding, Liang, 2012. "The Thursday effect of the forward premium puzzle," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 302-318.
    13. Newbold, Paul & Wohar, Mark E. & Rayner, Tony & Kellard, Neil & Ennew, Christine, 1998. "Two puzzles in the analysis of foreign exchange market efficiency," International Review of Financial Analysis, Elsevier, vol. 7(2), pages 95-111.
    14. Brian Lucey & Grace Loring, 2012. "Forward Exchange Rate Biasedness across Developed and Developing Country Currencies - Do Observed Patterns Persist Out of Sample?Abstract:," The Institute for International Integration Studies Discussion Paper Series iiisdp404, IIIS.
    15. Loring, Grace & Lucey, Brian, 2013. "An analysis of forward exchange rate biasedness across developed and developing country currencies: Do observed patterns persist out of sample?," Emerging Markets Review, Elsevier, vol. 17(C), pages 14-28.

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