FORWARD PREMIUMS AS UNBIASED PREDICTORS OF FUTURE CURRENCY DEPRECIATION - A NONPARAMETRIC ANALYSIS

large body of literature employing regression analysis has reported th at the forward premium is not an unbiased predictor of future currency depreciation. Many studies argue that the forward market unbiasedness hypothesis may be falsely rejected due to biased parameter estimates. Possible sources of bias include: the existence of a time-varying ris k premium, systematic forecast errors and measurement errors. This pap er investigates whether the forward premium can predict the direction of change in the future spot exchange rate using a distribution-free, nonparametric approach. Our tests strongly reject the unbiasedness hyp othesis and conclude that the forward premium contains either no infor mation or the 'wrong' information about future currency depreciation. (C) 1997 Elsevier Science Ltd.