Abstract
Thanks mainly to the work of Post Keynesian economists, it is no longer universally accepted that the forward exchange rate is an accurate, unbiased and efficient forecaster of the spot exchange rate. However, the proposition that futures prices of crude oil can be used to forecast spot prices seems to be accepted without much scrutiny. This proposition is challenged both theoretically and empirically, suggesting instead that futures prices have nothing to do with forecasting. Since spot and futures prices are related contemporaneously, futures prices are as good or as bad forecasters as spot prices, in which case it is not sound to use the futures price as a forecaster and the spot price as a benchmark. The results show that spot and futures prices are not as good forecasters as they are portrayed to be. While futures prices produce small forecasting errors, because they are related contemporaneously to spot prices, they fail to capture turning points and exhibit signs of biasedness and inefficiency. Adjusting the random walk and the unbiased efficiency equations, by including a time-varying risk premium or a drift factor, does not make the models better in terms of predicting turning points.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
