Forward Rate Unbiasedness Hypothesis in the Tunisian Foreign Exchange Market

Abstract

Based on a linear framework, this paper aims to examine the relationship between future spot rates and forward exchange rates using USD-TND data, thanks to traditional regressions and to the Vector Error Correction Model (VECM) in order to check if the Unbiasedness Forward Exchange Rate (UFER) hypothesis is satisfied and if the forward premiums contain valuable information useful to forecast the subsequent path that will be taken by spot exchange rates. The empirical analysis reveals that the UFER hypothesis is rejected and that the forward premium is a crucial tool, particularly at short term, to detect the future movements of spot exchange rates. A potential enrichment of such a paper will rely on a non linear framework.

Keywords: UFER hypothesis, cointegration, error correction, VECM

JEL Classification: F31, G15, C01