| dc.description.abstract | Conventional spot return and forward premium regressions have long been known to provide a strong rejection of the Forward Rate Unbiased Hypothesis which is a puzzle in the international financial field. However, due to the highly persistent in the forward premium, which shows estimated autoregressive roots close statistically indistinguishable from one, recent literature has cast doubt on the finite sample accuracy of these tests. In fact, finite sample size distortion, which could be from conventional statistics, has now come to be considered as one of several possible explanations behind the forward premium puzzle. In particular, this paper revisit the unbiasedness hypothesis using more appropriate inference method which is called Bonferroni Q-test proposed by Campbell and Yogo (2006).
The paper uses exchange rate of AUD, CAD, ECU, JPY, NZD, GBD, and SWF, which both relative to USD, to discuss the relationship between spot rate and one-month forward rate. The empirical results show that confidence interval of every forward premium’s autoregressive root include one except for CAD. In addition, the estimated correlation between the innovations to return and predictor variable is too low to cause serious problem of endogeneity which can reject the Forward Rate Unbiased Hypothesis in 10% significance level. | en_US |