The unbiased forward rate hypothesis before and after the inflation targeting regime in South Africa: A cointegration Analysis

Mavee, Nasha and Bonga-Bonga, Lumengo (2017): The unbiased forward rate hypothesis before and after the inflation targeting regime in South Africa: A cointegration Analysis.

Abstract

This paper investigates the relationship between the future spot and forward rates in the South African foreign exchange market to infer whether the unbiased forward rate hypothesis (UFRH) holds in South Africa. More specifically we examine whether the hypothesis holds in the face of the different monetary policy regimes taken by the South African reserve bank. We distinguish between two periods; (1) the period before inflation targeting and (2) the period after inflation targeting from February 2000 to the present. The study applies the autoregressive dynamic lag (ARDL) cointegration technique to test the existence of the long-run relationship between the two variables. The results of this investigation indicate that existence of a long-run relationship between the two variables for all forward rates horizons, especially for the period after inflation targeting. This indicates that an improvement of market efficiency in South Africa during the inflation targeting period.

• Item Type: MPRA Paper
• Language: English
• Keywords: UFRH, cointegration, monetary policy
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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