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The forward rate unbiasedness hypothesis revisited
Author(s) -
Razzak W.A.
Publication year - 2002
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/ijfe.193
Subject(s) - numéraire , economics , us dollar , forward rate , term (time) , currency , interest rate parity , liberian dollar , exchange rate , purchasing power parity , econometrics , interest rate , monetary economics , physics , finance , quantum mechanics
It is widely accepted that long‐term interest rates are more suitable for testing the Uncovered Interest Rate Parity (UIP) than shorter‐term rates. This paper shows that while using longer‐term (1‐year) forward exchange rates are also more suitable than shorter‐term rates (1‐month) for testing the forward exchange rate unbiasedness hypothesis (FRUH) the test is sensitive to the choice of the numeraire currency, i.e. the US dollar, the Deutsche mark (DM) or the Japanese yen. The FRUH holds in currencies measured in terms of the US dollar when a one‐year forward contract is used instead of a one‐month contract, but it does not hold when the DM and the yen are used as numeraire currencies. Copyright © 2002 John Wiley & Sons, Ltd.