Forward Rate Bias in Developed and Developing Countries: More Risky Not Less Rational

Abstract

This paper examines the stability of the Bilson–Fama regression for a panel of 55 developed and developing countries. We find multiple break points for nearly every country in our panel. Subperiod estimates of the slope coefficient show a negative bias during some time periods and a positive bias during other time periods in nearly every country. The subperiod biases display two key patterns that shed light on the literature’s linear regression findings. The results point toward the importance of risk in currency markets. We find that risk is greater for developed country markets. The evidence undercuts the widespread view that currency returns are predictable or that developed country markets are less rational.

Celebrated Econometricians: Katarina Juselius and Søren Johansen

“…A final set of three papers focuses on applications, (Gjelsvik et al 2020;Goldberg et al 2020;Lütkepohl and Netšunajev 2018). Lütkepohl and Netšunajev (2018) study the relationship between the stock market and monetary policy.…”

“…They conclude that collective wage negotiations in manufacturing have defined wage norms over the period 1980Q1-2014Q4. Goldberg et al (2020) consider the Bilson-Fama regression of future change of the spot exchange rate on the forward premium and find break points for nearly every country. This and further analyses question the widespread view that currency returns are predictable or that developed country markets are less rational.…”