TY - JOUR
T1 - A re-examination of the unbiased forward rate hypothesis in the presence of multiple unknown structural breaks
AU - Hatemi-J, Abdulnasser
AU - Roca, Eduardo
PY - 2012/4
Y1 - 2012/4
N2 - 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.
AB - 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.
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U2 - 10.1080/00036846.2010.543075
DO - 10.1080/00036846.2010.543075
M3 - Article
AN - SCOPUS:80051696625
SN - 0003-6846
VL - 44
SP - 1443
EP - 1448
JO - Applied Economics
JF - Applied Economics
IS - 11
ER -