If foreign exchange market participants form rational forecasts of future exchange rates, we should expect that these forecasts should be closely matched to subsequent realizations. Specifically, rational forecasts of a time series and the observed series itself should be cointegrated. In this...

An enduring problem in international finance is forward premium bias. Forward rates consistently provide biased estimates of future exchange rate movements. Some attack the rationality assumption for the foreign exchange market, claiming the forward premium may reflect irrational expectations of...