Day-of-Week Effects in Tests of Forward Foreign Exchange Rate Unbiasedness.

The day of the week on which the forward rate is quoted and the day of the week on which the corresponding one-period ahead spot rate matched to the delivery date of the forward contract is quoted may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These "day-of-week" effects are motivated from an inventory carrying cost argument as in Bessembinder (1994) and introduced into a simple model for forward foreign exchange market efficiency. Empirical results show that the point estimates are generally consistent with the hypotheses; however, large standard errors make discriminatory power weak and conclusions regarding the role of inventory carrying costs in the magnitude of the forward premium bias debatable. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.