This paper demonstrates that the estimated parameters in previous research, with wrong signs and absurd sizes, do not indicate market inefficiency and market behavior as they appear to. In the real world where forecasting errors are substantially large, a "correct" or an "unreasonable" parameter estimate renders almost identical results. Specifically, we demonstrate that an absolutely unbiased predictor is irrelevant empirically, and the unknowingly pursuit of absolute unbiasedness is misleading. What needs to be verified is a sufficiently unbiased predictor, which may appear to be incredibly biased under the circumstances with expected, specified, probabilistic errors. (c) 2008 Elsevier Ltd. All rights reserved.
|Number of pages||15|
|Journal||Journal of International Money and Finance|
|Publication status||Published - 1 Mar 2009|
- Forward premium
- Foreign exchange rate