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| Author: | Brooks, R. Livingston, M. |
| Title: | The local versus the unbiased expectations hypothesis with discrete compounding. |
| Journal: | Journal of Business Finance and Accounting
1992 : NOV, VOL. 19:6, p. 877-888 |
| Index terms: | PRICES EXPECTATIONS EMPIRICAL RESEARCH FORECASTING TECHNIQUES |
| Language: | eng |
| Abstract: | This paper demonstrates theoretically that the difference between the Local and Unbiased Expectations Hypothesis is more than Jensen's Inequality in discrete time. Sufficient conditions for these two hypotheses to differ only by Jensen's Inequality are that all forward prices are independent of each other and that forward prices follow a martingale. Empirically, forward prices are clearly not independent and evidence against forward prices following a martingale was found for a few maturities. The Local Hypothesis was found to have larger average prediction errors accompanied by larger variation. For the shorter maturities these prediction errors were found to be highly correlated but this correlation declined for larger maturities. |
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