Forward Unbiasedness Hypothesis Research Articles

Foreign exchange market efficiency and the global financial crisis: Fundamental versus technical information

This paper examines whether the 2007 - 2008 global financial crisis (GFC) played any role in changing the state of efficiency for the foreign exchange markets. For comparison purposes, I assess market efficiency based on the forward unbiasedness hypothesis (FUH) as well as the profitability of simple technical trading rules in the form of moving average, momentum, and relative strength index. A general finding from my comparative analysis (the FUH vis-à-vis technical trading rules) reveals that the GFC causes a time variation in the performance of currency markets, but both tests predict opposite conclusions on the direction of the change in the state of market performance. This evidence emphasizes the importance of qualifying the difference between fundamental and technical information when investigating the efficiency of foreign exchange markets.

New evidence on the forward unbiasedness hypothesis in the foreign-exchange market

A large empirical literature has tested the unbiasedness hypothesis in the foreign-exchange market with the use of forward exchange rates. This article amends the conventional testing framework to exploit the information in currency options, with a newly constructed data set for three major dollar exchange rates. The main results are that (a) tests based on stationary regressions suggest that options provide biased predictions of the future spot exchange rate, and (b) co-integration–based tests that are robust to several statistical problems afflicting stationary regressions and allow for endogeneity issues arising from a potential omitted risk premium term are supportive of unbiasedness. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:627–656, 2006

Forward exchange rates and expectations during the 1920s: A re-examination of the evidence

The Philips-Hansen fully modified Wald test is used to analyze whether or not the forward rate is an unbiased predictor of the future spot rate for the 1920s. Daily data for five exchange rates (German mark, Belgium franc, French franc, Italian lira and US dollar versus the British pound) are examined. The results suggest that the forward unbiasedness hypothesis can be rejected in three (Belgium franc, French Franc and German mark) out of the five currencies. This result may be due to the presence of a risk premium for the Belgian and French francs and to market failure in the case of the German mark, the forward and future spot exchange rates are cointegrated. (JEL F31).