Day-of-week effects in tests of forward foreign exchange rate unbiasedness

✍ Scribed by Janice Boucher Breuer

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 146 KB
• Volume: 4
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/(sici)1099-1158(199907)4:3<193::aid-ijfe101>3.0.co;2-a

✦ Synopsis

The day of the week on which the forward rate is quoted and the day of the week on which the corresponding one-period ahead spot rate matched to the delivery date of the forward contract is quoted may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These 'day-of-week' effects are motivated from an inventory carrying cost argument as in Bessembinder ( 1994) and introduced into a simple model for forward foreign exchange market efficiency. Empirical results show that the point estimates are generally consistent with the hypotheses; however, large standard errors make discriminatory power weak and conclusions regarding the role of inventory carrying costs in the magnitude of the forward premium bias debatable.