The forward bias: is it a money tree?

This paper examines the forward discount anomaly, i.e. the fact that the fo rward exchange rate is a biased predictor of the future spot rate. We run a series of rolling regressions which we use to predict the value of the fut ure spot rate based upon this bias. We show that the average return from an investment strategy based on the bias in forward exchange rates is in many cases insignificantly different from zero. In other cases, however, the re turn is significantly positive. Hence the in-sample bias does not necessari ly lead to a money-making strategy for all currencies. (C) 1998 Elsevier Sc ience S.A. All rights reserved.