A re-examination of the unbiased forward rate hypothesis in the presence of multiple unknown structural breaks

Abdulnasser Hatemi-J, Eduardo Roca

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)

    Abstract

    We test the Unbiased Forward Rate (UFR) hypothesis using new tests for cointegration developed by Hatemi-J (2008a) that allows for multiple unknown structural breaks. We analyse the Australian dollar (AUD), Euro (EUR), British pound (GBP) and Japanese yen (JPY) (versus the US dollar (USD)) spot rates and forward rates relationship during the period 5 January 1999 to 28 December 2006. We find that the UFR does hold when the effects of the unknown structural breaks are taken into account. The parameters that we obtained were close to unity; hence, taking into account transaction cost and the existence of a risk premium, earning arbitrage profits may still not be possible. Thus, the markets for these currencies may still be considered as efficient.

    Original languageEnglish
    Pages (from-to)1443-1448
    Number of pages6
    JournalApplied Economics
    Volume44
    Issue number11
    DOIs
    Publication statusPublished - Apr 2012

    ASJC Scopus subject areas

    • Economics and Econometrics

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