The joint dynamic of spot and forward exchange rates

Zusammenfassung

One and three-month forward exchange rates for a number of currencies seem to be cointegrated with jUture spot rates, but not with current exchange rates, We confirm the unbiasedness hypothesis as a robust cointegrating relation between forward and future spot rates, although forward rates are poor predictors of future exchange rates. The behaviour of exchange rates seems to be quite consistent with unpredictability of exchange rates. Forward rates seem to be rather passive, mostly reflecting current exchange rates, rather than anticipating future exchange rates fluctuations. These results suggest that reducing the analysis of the information content of forward rates to cointegration tests with current and future exchange rates would be misleading. We find some evidence of a risk/term premium but, being of minimium size, suggests that recent arguments on the inefficiency of currency markets are theoretically sound, but of minor empirical relevance.