Dynamic and Stochastic Instability and the Unbiased Forward Rate Hypothesis : A Variable Mean Response Approach

Since the mid-1970's, the unbiased forward rate hypothesis (UFRH) of forward and spot exchange rates has been intensively studied and tested with inconclusive and contradictory results. On the basis of the hypothesis, this paper provides variable mean response (VMR) random coefficients models to capture the time-varying and stochastic behavior of the slope coefficient to be referred to as the currency beta, and offers more explicit information concerning the nature of the random disturbance, the specification of the heteroscedastic error, and the existence of linear and quadratic trends