An Empirical Analysis of Relationships of Forward Exchange Rates and Present and Future Spot Exchange Rates

The aim of this paper is to present an empirical analysis of the relationships between the forward and spot exchange rates in the Czech Republic. The forward rate unbiasedness hypothesis, the expectation hypothesis, the adaptive expectation hypothesis and the hypothesis of covered interest rate pari...

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Bibliographic Details
Published in:Finance a úvěr 2017-01, Vol.67 (3), p.199
Main Authors: Arlt, Josef, Mandel, Martin
Format: Article
Language:English
Subjects:
Arbitrage
Cointegration analysis
Currency
Econometrics
Economic models
Efficient markets
Error correction & detection
Expected values
Foreign exchange markets
Foreign exchange rates
Forward exchange
Hypotheses
Interest rate parity theorem
Interest rates
Risk premiums
Time series
Transition economies
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Summary:The aim of this paper is to present an empirical analysis of the relationships between the forward and spot exchange rates in the Czech Republic. The forward rate unbiasedness hypothesis, the expectation hypothesis, the adaptive expectation hypothesis and the hypothesis of covered interest rate parity are formulated in this paper. To test the first two hypotheses the econometric procedure based on co-integration and weak exogeneity testing is proposed. The third and fourth hypotheses are verified by the Engle-Granger cointegration test. The estimates do not support the forward rate unbiasedness hypothesis. On the contrary, the results confirm the hypothesis of adaptive expectation and the hypothesis of covered interest rate parity.
ISSN:0015-1920
2464-7683