THE UNBIASED FORWARD RATE HYPOTHESIS REEXAMINED

This gaper examines the unbiased forward rate hypothesis using an Erro r Correction Model (ECM). Previous tests have utilized mainly two spec ifications-differences and levels. The advantage of the ECM is that th e parameters of the level specification appear in the error correction term, and hence the ECM provides a direct link to the levels specific ation. In this paper we fully exploit this link and demonstrate that b oth specifications yield essentially the same results when the ECM is explicitly derived from a levels specification and the levels paramete rs are estimated simultaneously with other parameters of the ECM.