Pcb. Phillips et al., ROBUST-TESTS OF FORWARD EXCHANGE MARKET-EFFICIENCY WITH EMPIRICAL-EVIDENCE FROM THE 1920S, Journal of applied econometrics, 11(1), 1996, pp. 1-22
This paper provides a robust statistical approach to testing the unbia
sedness hypothesis in forward exchange market efficiency studies. The
methods we use allow us to work explicitly with levels rather than dif
ferenced data. They are statistically robust to data distributions wit
h heavy tails, and they can be applied to data sets where the frequenc
y of observation and the futures maturity do not coincide. In addition
, our methods allow for stochastic trend non-stationarity and general
forms of serial dependence. The methods are applied to daily data of s
pot exchange rates and forward exchange rates during the 1920s, which
marked the first episode of a broadly general floating exchange rate s
ystem. The tail behaviour of the data is analysed using an adaptive da
ta-based method for estimating the tail slope of the density. The resu
lts confirm the need for the use of robust regression methods. We find
cointegration between the forward rate and spot rate for the four cur
rencies we consider (the Belgian and French francs, the Italian lira a
nd the US dollar, all measured against the British pound), we find sup
port for a stationary risk premium in the case of the Belgian franc, t
he Italian lira and the US dollar, and we find support for the simple
market efficiency hypothesis (where the forward rate is an unbiased pr
edictor of the future spot rate and there is a zero mean risk premium)
in the case of the US dollar.