The unbiasedness of the forward exchange rate: evidence from the 1920s

Abstract

The relationship between the spot and forward exchange rates during the 1920s is reexamined for five major currencies with daily data. Johansen's (1988, 1991) methodology is used to test for cointegration between spot and forward exchange rates. The results show that the spot and forward exchange rates are cointegrated with a cointegrating vector of one, providing evidence in support of the unbiasedness of the forward exchange rate and market efficiency. Johansen's method provides stronger evidence in favour of the unbiasedness hypothesis compared to the residual based single equation OLS approach.