It is a well-accepted empirical result that forward exchange rate unbiasedness is rejected in tests using the "differences regression" of the change in the logarithm of the spot exchange rate on the forward discount. We model the forward discount as an AR(1) process and argue that its...

The Kalman filter methodology is employed to develop a dynamic sector allocation model for US equities. Bayesian parameter estimation and model selection criteria result in significantly improved sector return predictability over static or rolling parameter specifications. A simple trading...