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Unit root and cointegration tests on the efficiency and biasedness of forward exchange rates

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Abstract

This paper analyzes the stationarity of spot and forward exchange rates by testing for the presence of unit roots in the autoregressive process of the exchange rate time series. The results of the unit root and cointegration tests for forward exchange rates of six major currencies are inconsistent with earlier studies by others that found the existence of unit roots but the absence of cointegration. Our results show that realized spot rates are cointegrated with past forward rates. Both Dickey-Fuller and Augmented Dickey-Fuller tests affirm the unbiased forward rate hypothesis for 30- and 90-day forward rates. The Augmented Dickey-Fuller tests on the longer term forward rate, however, reveal the existence of cointegration that leads to the rejection of the hypothesis.

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Authors and Affiliations

  1. Memphis State University, 38152, Memphis, TN

    C. S. Pyun & Richard D. Evans

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  1. C. S. Pyun
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  2. Richard D. Evans
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Pyun, C.S., Evans, R.D. Unit root and cointegration tests on the efficiency and biasedness of forward exchange rates. J Econ Finan 17, 139–150 (1993). https://doi.org/10.1007/BF02920645

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