THE ROAD LESS TRAVELED - INSTITUTIONAL ASPECTS OF DATA AND THEIR INFLUENCE ON EMPIRICAL ESTIMATES WITH AN APPLICATION TO TESTS OF FORWARD RATE UNBIASEDNESS

The difference between data used in empirical studies and that envisio ned in the theory can influence empirical estimates, sometimes by enou gh that the direction of future research is altered. This paper illust rates how, in the context of tests of forward rate unbiasedness, a lac k of articulation about the mechanics underlying foreign exchange mark et speculation and about the institutional aspects governing spot and forward rate contracts leads to sampling of the data in a way that is not consistent with the theory. We find that the sampling problems acc ount for some, but not all of the bias in the coefficient on the forwa rd premium.