✦ LIBER ✦
Testing the unbiased forward exchange rate hypothesis using a Markov switching model and instrumental variables
✍ Scribed by Fabio Spagnolo; Zacharias Psaradakis; Martin Sola
- Publisher
- John Wiley and Sons
- Year
- 2005
- Tongue
- English
- Weight
- 143 KB
- Volume
- 20
- Category
- Article
- ISSN
- 0883-7252
- DOI
- 10.1002/jae.773
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✦ Synopsis
Abstract
This paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing the unbiased forward exchange rate (UFER) hypothesis. Using US/UK data, it is shown that the UFER hypothesis cannot be rejected, provided that instrumental variables are used to account for within‐regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based. Copyright © 2005 John Wiley & Sons, Ltd.