Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis

@article{Hansen1980ForwardER,
  title={Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis},
  author={Lars Peter Hansen and Robert J. Hodrick},
  journal={Journal of Political Economy},
  year={1980},
  volume={88},
  pages={829 - 853}
}
This paper examines the hypothesis that the expected rate of return to speculation in the forward foreign exchange market is zero; that is, the logarithm of the forward exchange rate is the market's conditional expectation of the logarithm of the future spot rate. A new computationally tractable econometric methodology for examining restrictions on a k-step-ahead forecasting equation is employed. Using data sampled more finely than the forecast interval, we are able to reject the simple market… Expand
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