Forward exchange rates and expectations during the 1920s: A re-examination of the evidence

The Philips-Hansen fully modified Wald test is used to analyze whether or not the forward rate is an unbiased predictor of the future spot rate for the 1920s. Daily data for five exchange rates (German mark, Belgium franc, French franc, Italian lira and US dollar versus the British pound) are examined. The results suggest that the forward unbiasedness hypothesis can be rejected in three (Belgium franc, French Franc and German mark) out of the five currencies. This result may be due to the presence of a risk premium for the Belgian and French francs and to market failure in the case of the German mark, the forward and future spot exchange rates are cointegrated. (JEL F31).