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- Title
The Forward Exchange Rate Bias Puzzle Is Persistent: Evidence from Stochastic and Nonparametric Cointegration Tests.
- Authors
Aggarwal, Raj; Lucey, Brian M.; Mohanty, Sunil K.
- Abstract
An important puzzle in international finance is the failure of the forward exchange rate to be a rational forecast of the future spot rate. We document that even after accounting for nonstationarity, nonnormality, and heteroskedasticity using parametric and nonparametric tests on data for over a quarter century, U.S. dollar forward rates for the major currencies (the British pound, Japanese yen, Swiss franc, and the German mark) are generally not rational forecasts of future spot rates. These findings deepen the forward exchange rate bias puzzle, especially as these markets are the most liquid foreign exchange markets with very low trading costs.
- Subjects
FOREIGN exchange futures; FINANCIAL futures; U.S. dollar; POUND sterling; SWISS franc; JAPANESE yen; MARK (German currency); FOREIGN exchange market
- Publication
Financial Review, 2009, Vol 44, Issue 4, p625
- ISSN
0732-8516
- Publication type
Article
- DOI
10.1111/j.1540-6288.2009.00233.x