Non-informative tests of the unbiased forward exchange rate

This paper reexamines a familiar but unsettling result in the foreign excha nge literature: that the forward rate is not an unbiased predictor of the f uture spot rate. The paper outlines why some frequently used tests of unbia sedness are non-informative in the sense that they are incapable of correct ly testing the hypothesis. Specifically, many of these tests are based on r egressions that suffer from simultaneity bias, resulting in biased and inco nsistent estimators. This is true whether the tests are conducted using sta tionary or non-stationary data. We demonstrate this point both analytically and with simulations. Tests of co-integration, which are not subject to th e critique presented in the paper, generally fail to reject unbiasedness.