Exogeneity and forward rate unbiasedness

Stefan C. Norrbin, Kevin Reffett

Research output: Contribution to journalArticle

15 Citations (Scopus)

Abstract

Recent studies have rejected the forward rate efficiency hypothesis because of a failure to find support for the forward rate unbiasedness condition (FRUC). This condition states that spot and forward rates should be cointegrated with a unit cointegrating vector. These studies have focused on inferences drawn from partial system error-correction approaches that make critical assumptions concerning the exogeneity of forward rates. Taking a full systems approach to estimation without any a priori weak exogeneity assumptions, we find support for FRUC, and that spot rates, not forward rates, are weakly exogenous in the sense of Engle, Hendry, and Richard (1983). The latter finding implies that the rejection of the FRUC in prior research may be due to the incorrect implied exogeneity assumptions. (JEL F31, F40, C32).

Original languageEnglish (US)
Pages (from-to)267-274
Number of pages8
JournalJournal of International Money and Finance
Volume15
Issue number2
DOIs
StatePublished - Apr 1996

Fingerprint

Exogeneity
Forward rates
Unbiasedness
Systems approach
Error correction
Inference
Weak exogeneity

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Exogeneity and forward rate unbiasedness. / Norrbin, Stefan C.; Reffett, Kevin.

In: Journal of International Money and Finance, Vol. 15, No. 2, 04.1996, p. 267-274.

Research output: Contribution to journalArticle

@article{c3aa7ea580c746e3a7bdf99d0eab8f85,
title = "Exogeneity and forward rate unbiasedness",
abstract = "Recent studies have rejected the forward rate efficiency hypothesis because of a failure to find support for the forward rate unbiasedness condition (FRUC). This condition states that spot and forward rates should be cointegrated with a unit cointegrating vector. These studies have focused on inferences drawn from partial system error-correction approaches that make critical assumptions concerning the exogeneity of forward rates. Taking a full systems approach to estimation without any a priori weak exogeneity assumptions, we find support for FRUC, and that spot rates, not forward rates, are weakly exogenous in the sense of Engle, Hendry, and Richard (1983). The latter finding implies that the rejection of the FRUC in prior research may be due to the incorrect implied exogeneity assumptions. (JEL F31, F40, C32).",
author = "Norrbin, {Stefan C.} and Kevin Reffett",
year = "1996",
month = "4",
doi = "10.1016/0261-5606(96)00005-8",
language = "English (US)",
volume = "15",
pages = "267--274",
journal = "Journal of International Money and Finance",
issn = "0261-5606",
publisher = "Elsevier BV",
number = "2",

}

TY - JOUR

T1 - Exogeneity and forward rate unbiasedness

AU - Norrbin, Stefan C.

AU - Reffett, Kevin

PY - 1996/4

Y1 - 1996/4

N2 - Recent studies have rejected the forward rate efficiency hypothesis because of a failure to find support for the forward rate unbiasedness condition (FRUC). This condition states that spot and forward rates should be cointegrated with a unit cointegrating vector. These studies have focused on inferences drawn from partial system error-correction approaches that make critical assumptions concerning the exogeneity of forward rates. Taking a full systems approach to estimation without any a priori weak exogeneity assumptions, we find support for FRUC, and that spot rates, not forward rates, are weakly exogenous in the sense of Engle, Hendry, and Richard (1983). The latter finding implies that the rejection of the FRUC in prior research may be due to the incorrect implied exogeneity assumptions. (JEL F31, F40, C32).

AB - Recent studies have rejected the forward rate efficiency hypothesis because of a failure to find support for the forward rate unbiasedness condition (FRUC). This condition states that spot and forward rates should be cointegrated with a unit cointegrating vector. These studies have focused on inferences drawn from partial system error-correction approaches that make critical assumptions concerning the exogeneity of forward rates. Taking a full systems approach to estimation without any a priori weak exogeneity assumptions, we find support for FRUC, and that spot rates, not forward rates, are weakly exogenous in the sense of Engle, Hendry, and Richard (1983). The latter finding implies that the rejection of the FRUC in prior research may be due to the incorrect implied exogeneity assumptions. (JEL F31, F40, C32).

UR - http://www.scopus.com/inward/record.url?scp=0030116248&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0030116248&partnerID=8YFLogxK

U2 - 10.1016/0261-5606(96)00005-8

DO - 10.1016/0261-5606(96)00005-8

M3 - Article

AN - SCOPUS:0030116248

VL - 15

SP - 267

EP - 274

JO - Journal of International Money and Finance

JF - Journal of International Money and Finance

SN - 0261-5606

IS - 2

ER -