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Term effects and the time‐varying risk premium in tests of forward foreign exchange rate unbiasedness
Author(s) -
Boucher Breuer Janice
Publication year - 2000
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/1099-1158(200007)5:3<211::aid-ijfe125>3.0.co;2-p
Subject(s) - economics , forward rate , term (time) , forward contract , risk premium , econometrics , valuation (finance) , exchange rate , foreign exchange , forward price , financial economics , monetary economics , interest rate , futures contract , finance , physics , quantum mechanics
The term (or number of days) until a 1‐month forward contract is delivered may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These ‘term effects’ arise because a 1‐month forward contract is not equal to a pre‐specified number of days and, thus, the risk of valuation changes over the life of the contract depend on the contract's exact term. The term effect is consistent with a time‐varying risk premium. However, empirical results provide no evidence of a term effect and so other explanations must be considered. Copyright © 2000 John Wiley & Sons, Ltd.