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The Forward Rate as a Predictor of the Future Spot Rate--A Stochastic Coefficient Approach

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  • Chiang, Thomas C

Abstract

This paper develops a stochastic coefficient model to examine the unbiased forward rate hypothesis for the period January 1974 to August 1983. Tests from the full-sample estimations confirm the null hypothesis. However, the re sults from the Brown-Durbin-Evans (1975) test and the Chow test indic ate that the exchange-rate behavior departs from parameter constancy. Using joint-rolling regressions for the subsample estimations, the a uthor finds evidence that the unbiasedness hypothesis in most cases s hould be rejected and that the estimated parameters, sensitive to new information, vary through different subsample periods. The out-of-sa mple test concludes that incorporation of the stochastic properties o f the parameters into the model improves accuracy of exchange-rate pr edictions. Copyright 1988 by Ohio State University Press.

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  • Chiang, Thomas C, 1988. "The Forward Rate as a Predictor of the Future Spot Rate--A Stochastic Coefficient Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 212-232, May.
    • Handle: RePEc:mcb:jmoncb:v:20:y:1988:i:2:p:212-32
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