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|Title:||Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables|
|Keywords:||Instrumental variables; Forward exchange rate; Markov chain; Maximum likelihood;;Regime switching.|
|Citation:||Economics and Finance Working papers, Brunel University, 03-15|
|Abstract:||This paper develops a model for the forward and spot exchange rate which allows for the presence of a Markov switching risk premium in the forward market and considers the issue of testing for the unbiased forward exchange rate (UFER) hypothesis. Using US/UK data, it is shown that the UFER hypothesis cannot be rejected provided that instrumental variables are used to account for within-regime correlation between explanatory variables and disturbances in the Markov switching model on which the test is based.|
|Appears in Collections:||Dept of Economics and Finance Research Papers|
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