Abstract
This paper tests the hypotheses that (1) risk premia fully account for the observed systematic discrepancies between forward and future spot exchange rates; and (2) ‘efficient markets versions’ of PPP holds. A simple theoretical framework is used to derive testable restrictions on the parameters of a multivariate regression model. The data reject the restrictions and each hypothesis. In contract to past investigations, the empirical analysis strongly suggest that forward exchange rates incorporate anticipated real exchange rate movements.
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