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Some answers to puzzles in testing unbiasedness in the foreign exchange market

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  • Scott Barnhart
  • Robert McNown
  • Myles Wallace

Abstract

Similar but alternative specifications of tests of forward rate unbiasedness provide conflicting evidence on the rejection of the hypothesis. These conflicting results are reconciled by demonstrating that although the root cause is simultaneity bias, the severity of this bias and the resulting rejection or non-rejection of the hypothesis depends entirely on the relative error variance empirical regularity common to foreign exchange markets. The analysis presented here applies to both stationary and non-stationary specifications of the model.

Suggested Citation

  • Scott Barnhart & Robert McNown & Myles Wallace, 2002. "Some answers to puzzles in testing unbiasedness in the foreign exchange market," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 687-696.
    • Handle: RePEc:taf:apfiec:v:12:y:2002:i:10:p:687-696
    DOI: 10.1080/09603100110039782
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    References listed on IDEAS

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    Cited by:

    1. Lucio Sarno & Giorgio Valente & Hyginus Leon, 2006. "Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle," Review of Finance, European Finance Association, vol. 10(3), pages 443-482, September.
    2. Detken, Carsten & Gaspar, Ví­tor, 2003. "Maintaining price stability under free-floating: a fearless way out of the corner?," Working Paper Series 241, European Central Bank.
    3. repec:ebl:ecbull:v:6:y:2008:i:26:p:1-18 is not listed on IDEAS
    4. Sofiane Amri, 2008. "Analysing the forward premium anomaly using a Logistic Smooth Transition Regression model," Economics Bulletin, AccessEcon, vol. 6(26), pages 1-18.

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