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The forward rate unbiasedness hypothesis revisited

✍ Scribed by W.A. Razzak

Publisher
John Wiley and Sons
Year
2002
Tongue
English
Weight
233 KB
Volume
7
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

It is widely accepted that long‐term interest rates are more suitable for testing the Uncovered Interest Rate Parity (UIP) than shorter‐term rates. This paper shows that while using longer‐term (1‐year) forward exchange rates are also more suitable than shorter‐term rates (1‐month) for testing the forward exchange rate unbiasedness hypothesis (FRUH) the test is sensitive to the choice of the numeraire currency, i.e. the US dollar, the Deutsche mark (DM) or the Japanese yen. The FRUH holds in currencies measured in terms of the US dollar when a one‐year forward contract is used instead of a one‐month contract, but it does not hold when the DM and the yen are used as numeraire currencies. Copyright © 2002 John Wiley & Sons, Ltd.

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