Critical Finance Review > Vol 14 > Issue 4

The Instability of the Forward Rate Anomaly: Easy Money Was Always Too Good To Be True

By Michael D. Goldberg, University of New Hampshire, USA, Michael.Goldberg@unh.edu | Olesia Kozlova, Apple Corporation, USA, olesia.a.kozlova@gmail.com | Deniz Ozabaci, University of New Hampshire, USA, Deniz.Ozabaci@unh.edu | Peter Sullivan, Department of Economics, Middlesex School, USA, psullivan@mzschool.edu

 
Suggested Citation
Michael D. Goldberg, Olesia Kozlova, Deniz Ozabaci and Peter Sullivan (2025), "The Instability of the Forward Rate Anomaly: Easy Money Was Always Too Good To Be True", Critical Finance Review: Vol. 14: No. 4, pp 525-571. http://dx.doi.org/10.1561/104.00000168

Publication Date: 17 Dec 2025
© 2025 Michael D. Goldberg, Olesia Kozlova, Deniz Ozabaci, and Peter Sullivan
 
Subjects
 
Keywords
F31G14G15
Forward premium puzzleStructural change of predictive regressionsExchange rate risk premiumSystematic forecast errorsRational forecasting
 

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In this article:
1. Introduction 
2. Existing Evidence of Instability 
3. Characterizing the Anomaly’s Instability 
4. Explaining Forward Rate Biasedness 
5. Conclusion 
Appendix. Piecewise Linear Subperiod Mis-Specification Tests 
References 

Abstract

The paper checks the Bilson-Fama regression for discrete points of structural change. We find greater instability than previous studies and a forward rate bias that is more often insignificant or positive than negative as widely reported. We also find considerably more evidence of a time-varying risk premium. Systematic forecasting errors also play a key role, but the correlations are unstable and switch sign across many of the subperiods. The results present a challenge for the view that currency markets are systematically irrational.

DOI:10.1561/104.00000168