Abstract
Abstract : This paper tests the unbiased forward rate hypothesis (UFRH) in selected developed and emerging economies within the context of nonlinear models. Moreover, the paper assesses the extent of the nonlinear adjustment towards equilibrium between the spot and forward exchange rates in these economies. Using the smooth transition error correction model (STECM) to account for long-run relationship and asymmetric adjustment between the spot and forward prices, the results of the empirical analysis reveal that there is nonlinear adjustment between the spot and forward exchange rates in developed and emerging economies. In addition, the results show that the magnitude of the speed of adjustment to mitigate arbitrage opportunities triggered by the deviation between the spot and forward prices is higher in emerging than in developed markets. This occurs because the size of arbitrage profit is higher in emerging markets compared to developed markets.
M.Com. (Financial Economics)