We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Liquidity, Information and the Size of the Forward Exchange Rate Bias.
- Authors
BLENMAN, LLOYD; GUAN JUN WANG
- Abstract
We first develop the theoretical rationale of the forward exchange rate unbiasedness hypothesis (FUH) for buyers of forward exchange under an assumption of risk neutrality and interest rate parity. Then by using Jensen's Inequality, we show that FUH cannot simultaneously hold true for both the sellers and buyers of the same forward currency contracts. Because of the symmetric nature of relationships among foreign exchange currency pairs, we conjecture that forward rate biases should be small. We introduce a new test statistic that averts unit root problems. This test statistic helps verify our conjectures in the empirical data. We analyze the liquidity effect of the informational content of forward exchange rates using our test statistic. We show that whether unbiasedness holds or not is driven by market conditions of crisis or non-crisis.
- Subjects
FOREIGN exchange rates; BIAS (Law); BUSINESS cycle management; EURO; INTEREST rates
- Publication
Quarterly Journal of Finance & Accounting, 2017, Vol 55, Issue 1/2, p53
- ISSN
1939-8123
- Publication type
Article