A Comparative Study of Forward Rate Unbiased Hypothesis in Tunisian and Indian Foreign Exchange Markets

In the field of financial economics, the “Forward Rate Unbiased Hypothesis” (FRUH) has been the subject of intensive scrutiny by researchers. Empirical evidences suggest that there are major differences between the spot rates and the forward rates and the findings have not been able to yield any concrete evidence that the forward exchange rate is an unbiased predictor of the future spot exchange rate. In financial literature, majority of the work has focused on the forward rate and the spot rate of the currency of a single country. Cross country FRUH comparison has been rare. This paper is an attempt to fill the lacuna by comparing the FRUH in the Indian and the Tunisian Forex Market and to provide economic explanations for the divergences in findings. The dataset used in this study consists of 238 weekly observations of the Tunisian spot and forward exchange rates and Indian spot and forward exchange rate for the four-year period starting 01 April 2004 to 16 October 2008. Analysis shows that the FRUH does not hold in both the markets. However, FRUH seems to be more severe in the Indian markets than in the Tunisian markets. Furthermore, the slope coefficient's in the Indian case were negative as opposed to the Tunisian case suggesting that India is a more developed economy as compared to Tunisia. Based on our evidences, we highlight some reasons as to why the FRUH fails and suggest areas for further research