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Forward Unbiasedness in the Short End of the Interest Rate Market

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  • Samih Antoine Azar

Abstract

Forward rate unbiasedness postulates that the forward rate is an unbiased estimator or predictor of the future spot rate. This case of risk neutrality has been tested extensively especially in the foreign exchange market. This paper departs from this line of research and studies unbiasedness at the short end of the interest rate market. Although, a priori, an investment of 6 months and an investment of three months rolled over for an additional 3 months are commonly believed to be riskless at first approximation, our results show otherwise. The precision of our estimators unveil a small but statistically significant risk premium. The latter has two components, a constant risk premium and a time-variable one. The constant risk premium is estimated to be 14.4 basis points. The time-variable risk premium ranges between a maximum of 184.6 basis points, and a minimum of -123.2 basis points, and averages 5.4 basis points. The methodology in this paper is amenable and adaptable, with little adjustments, to other maturities. This is an agenda for the future.

Suggested Citation

  • Samih Antoine Azar, 2018. "Forward Unbiasedness in the Short End of the Interest Rate Market," International Business Research, Canadian Center of Science and Education, vol. 11(2), pages 70-78, February.
    • Handle: RePEc:ibn:ibrjnl:v:11:y:2018:i:2:p:70-78
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    References listed on IDEAS

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    More about this item

    Keywords

    unbiasedness; short term; interest rate market; neutrality; risk;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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