The objective of this dissertation is to verify and explain the forward exchange rate unbiasedness hypothesis in the foreign exchange market. Since in most of the cases the unbiasedness hypothesis fails to hold, we try to provide three different explanations of this puzzling behavior in the three essays. The first essay tries to resolve the forward premium puzzle by addressing the model misspecification issue and thereby adding a time-varying risk premium term in the percentage change specification. The risk premium term is modeled using the GARCH-M representation and the model is estimated by applying a GARCH (1, 1) specification. The second essay attributes the failure of the unbiasedness hypothesis to hold to the nonstationarity of the spot and forward exchange rate. It verifies the existence of a cointegrating relationship between the spot and the forward exchange rates and thus specifies an Error Correction Model to better capture the relation between the spot and the forward rates. Further, a cointegrating or the existence of a long run relationship between the spot and forward exchange rates and the domestic and foreign interest rates is tested. It can be viewed as a robustness check where we ensure whether the cointegrated exchange rates are still related in the long run with the inclusion of the interest rates. The objective of the third essay is to apply the generalized method of moments (GMM) to test the unbiasedness hypothesis in the foreign exchange market. Empirical evidence suggests that the spot and forward rates are nonstationary with unit roots and are cointegrated. Cointegration further suggests that the changes in the spot rate can be modeled by an Error Correction Model. The third essay explicitly derives an ECM from the levels specification and uses the GMM estimation technique to test the unbiasedness hypothesis.

This thesis provides a thorough analysis of the covered- and uncovered interest parity conditions (CIP, UIP) as well as the forward rate unbiasedness hypothesis (FRUH) for Sweden and the European Economic and Monetary Union (EMU). By studying data on interbank rates in Sweden (STIBOR) and the EMU (EURIBOR) as well as the corresponding spot- and forward exchange rates, monetary integration and country-specific risks are determined and analyzed with direct applications to the potential entry of Sweden into the EMU. As interest rate parity in general gives insight into market efficiency and frictions between the chosen regions, such points are discussed in addition to EMU entry. Drawing on past studies that mainly studied one condition in isolation, a nested formulation of interest rate parity is instead derived and tested using cointegration and robust estimation methods. The results point to a strict rejection of the FRUH for all horizons except the shortest and a case where CIP only holds for the 6-month horizon and partially over one year. This implies, based on the nested formulation, that UIP is rejected for all horizons as well. Ultimately, the study concludes that a Swedish entry into the EMU is not motivated given the lackluster results on UIP and due to the lack of monetary integration. / Den här uppsatsen presenterar en djupgående analys av det kurssäkrade- och icke-kurssäkrade ränteparitetsvillkoret samt den effektiva marknadshypotesen på valutaterminer för Sverige och den europeiska ekonomiska och monetära unionen (EMU). Genom att studera data på interbankräntor i Sverige (STIBOR) och EMU (EURIBOR) samt respektive spot- och valutaterminskurser så skattas och analyseras monetär integration samt landsspecifika risker med en direkt tillämpning på Sveriges eventuella inträde i EMU. Eftersom ränteparitet generellt ger insikt i marknadseffektivitet och friktioner regioner emellan, diskuteras även dessa punkter utöver ett eventuellt EMU-inträde. Genom att bygga på föregående studier som i huvudsak studerar ränteparitetsvillkoren var för sig, härleds en sekventiell formulering av villkoren som sedan testas med kointegration och robusta estimeringsmetoder. Resultaten ger att den effektiva marknadshypotesen strikt förkastas på alla tidshorisonter förutom på en dag respektive en vecka, samt att kurssäkrad ränteparitet håller på 6 och delvis 12 månaders sikt. Baserat på den sekventiella formuleringen så innebär detta att icke-kurssäkrad ränteparitet inte håller på någon tidshorisont. Slutligen, baserat på både resultat och diskussion, är ett svenskt inträde i EMU inte motiverbart givet negativa resultat för icke-kurssäkrad ränteparitet och avsaknaden av fullständig monetär integration mellan regionerna.