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
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.