IDEAS home Printed from https://ideas.repec.org/p/tri/wpaper/1310.html
   My bibliography  Save this paper

The Forward Exchange Rate Unbiasedness Hypothesis: A Single Break Unit Root and CointegrationAnalysis

Author

Listed:
  • Michael Mazur
  • Miguel Ramirez

    (Department of Economics, Trinity College)

Abstract

In an age of globalized finance, Forex market efficiency is particularly relevant as agents engage in arbitrage opportunities across international markets. This study tests the forward exchange rate unbiasedness hypothesis using more powerful tests such as the Zivot-Andrews single-break unit root and the KPSS stationarity (no unit root) tests to confirm that the USD/EUR spot and three-month forward rates are I(1) in nature. The study successfully employs Engle-Granger cointegration analysis which identifies a stable long-run relationship between the spot and forward rates and generates an ECM model that is used to forecast the in-sample (historical) data.The study’s findings refute past conclusions that fail to identify the data’s I(1) nature and suggests that market efficiency is present in the long run but not necessarily in the short run.

Suggested Citation

  • Michael Mazur & Miguel Ramirez, 2013. "The Forward Exchange Rate Unbiasedness Hypothesis: A Single Break Unit Root and CointegrationAnalysis," Working Papers 1310, Trinity College, Department of Economics.
    • Handle: RePEc:tri:wpaper:1310
    as

    Download full text from publisher

    File URL: http://www3.trincoll.edu/repec/WorkingPapers2013/WP13-10.pdf
    File Function: First version, 2013
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Phungo, Muka & Bonga-Bonga, Lumengo, 2019. "An analysis of the unbiased forward rate hypothesis in developed and emerging economies," MPRA Paper 92222, University Library of Munich, Germany.

    More about this item

    Keywords

    Cointegration analysis; Error-correction model (ECM); Forward exchange rate unbiasedness hypothesis (FRUH); KPSS no unit root test; unexploited profits; and Zivot-Andrews single break unit root test;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tri:wpaper:1310. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Miguel Ramirez (email available below). General contact details of provider: https://edirc.repec.org/data/edtrius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.