Phungo, Muka and Bonga-Bonga, Lumengo
(2019):
*An analysis of the unbiased forward rate hypothesis in developed and emerging economies.*

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## Abstract

This study assesses whether the unbiased forward rate hypothesis (UFRH) holds in its strong or weak form in selected developed and emerging economies. Moreover, the paper assesses whether this hypothesis, or the relationship between the forward and spot exchange rates, is better specified by a linear or nonlinear model. The paper makes use of the smooth transition error correction model (STECM) to account for long-run relationship and asymmetric adjustment between the two exchange rates. The results of the empirical analysis show the possibility of nonlinear cointegration between the spot and forward exchange rates in a number of developed and emerging economies. In addition, the results reveal that the magnitude of the speed of adjustment to cancel arbitrage opportunities is higher in emerging than in developed markets. This occurs because the size of arbitrage profit is higher in emerging markets compared to developed markets

Item Type: | MPRA Paper |
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Original Title: | An analysis of the unbiased forward rate hypothesis in developed and emerging economies |

English Title: | An analysis of the unbiased forward rate hypothesis in developed and emerging economies |

Language: | English |

Keywords: | forward market, spot market, exchange rate, unbiased forward rate hypothesis, smooth transition error correction model |

Subjects: | C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets |

Item ID: | 92222 |

Depositing User: | Prof Lumengo Bonga-Bonga |

Date Deposited: | 22 Feb 2019 14:41 |

Last Modified: | 01 Oct 2019 20:15 |

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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/92222 |