The unbiased forward rate hypothesis re-examined

This gaper examines the unbiased forward rate hypothesis using an Error Correction Model (ECM). Previous tests have utilized mainly two specifications-differences and levels. The advantage of the ECM is that the parameters of the level specification appear in the error correction term, and hence the ECM provides a direct link to the levels specification. In this paper we fully exploit this link and demonstrate that both specifications yield essentially the same results when the ECM is explicitly derived from a levels specification and the levels parameters are estimated simultaneously with other parameters of the ECM.