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IIMB Management Review

Document Type

Notes and Commentary

Abstract

The hypothesis of unbiasedness of the forward exchange rate as a predictor of the future spot rate has been subjected to extensive empirical testing. some researchers use the level form specification in which the actual spot rate is regressed on the k-period forward rate k periods age. While other use the percent change specification in which the k-period log change in spot rate is regressed on the forward premium /discount. The resuits from the two specifications are widely different and often contradictory. The problem lies in the presence of unit roots in both the spot and forward rate series and the cointegration of the two series. The correct specification requires an Error Correction Model originated by Engle and Granger. The paper estimates both versions for the exchange rates of the rupee against four major convertible currencies and confirms the earilier findings. It proceeds to estimate error correction models which on some cases involve lags upto nine periods.

Publication Date

6-1-1992

First Page

145

Last Page

145

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