Term effects and the time-varying risk premium in tests of forward foreign exchange rate unbiasedness

The term (or number of days) until a 1-month forward contract is delivered may play a systematic role in the empirical estimates of the coefficient on the forward premium in tests of forward foreign exchange rate unbiasedness. These 'term effects' arise because a 1-month forward contract is not equal to a pre-specified number of days and, thus, the risk of valuation changes over the life of the contract depend on the contract's exact term. The term effect is consistent with a time-varying risk premium. However, empirical results provide no evidence of a term effect and so other explanations must be considered. Copyright (C) 2000 John Wiley & Sons, Ltd.