Testing the Forward Rate Unbiasedness Hypothesis in Lebanon
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Date
2011
Authors
Keshishian, Viken Kevork
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Abstract
After November 1998, the adjustable peg of the Lebanese pound to the US dollar played a major role in maintaining financial and price stability in the country. It also helped in the expansion of the economy and in the massive capital inflows to the Lebanese market. Moreover, the high stock of assets in foreign currencies prevented Lebanon from any crisis that may hit the economy.
The thesis tests for the unbiased forward rate hypothesis as an optimal predictor of the future spot rate. It also supports the fact that the Lebanese pound became a perfect substitute to foreign currencies during the peg period.
The study is conducted for the period January 31, 1991 to October 31. The study is divided into two sub-periods. The first sub-period is prior to December 1998, which is renowned as the dirty float period, whereas the second sub period is after December 1998, which is referred to as the adjustable peg period.
The empirical results show that the unbiasedness forward rate hypothesis fails to be rejected during the adjustable peg period, whereas it is rejected in the earlier period. The rejection is due to a bias in the prediction by the forward rate, serial correlation, heteroscedasticity, non-normality of the residuals and a probable presence of a constant and significant risk premium. Moreover, the empirical results reveal that the Lebanese pound became a perfect substitute to foreign currencies during the adjustable peg period.
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Keshishian, V. K. (2011). Testing the Forward Rate Unbiasedness Hypothesis in Lebanon (MBA thesis, Haigazian University)