A note on the size of forward exchange rate bias

        Though numerous empirical research shows that the forward exchange rates are biased estimators of corresponding future spots rates, none of these research discusses the size of the forward exchange rate bias. In this paper, we first show theoretically that if forward rates are significantly downward (upward) biased estimators of corresponding future spot rates for one side of the market participants, then to the other side of the market participants, forward rates would be significantly upward (downward) biased estimators of future spot rates. Because of symmetry feature of foreign exchange markets, we conjecture that forward rate biases should be small. We introduce a new test statistic that averts unit root problems which commonly seen in conventional testing methods. We use a long data sample which covers a wide range of major currencies, including both liquid and non-liquid currency pairs, over 15 -year period, including both pre-crisis and post-crisis periods, for our empirical testing to avoid sample specific problems.  Our testing results show that in most cases the forward rate unbiased hypothesis is rejected. However the forward rate biases are found to be within 1% range for the popular viewed liquid currency pairs, and in all cases, we find the biases are within 2.2 % range at 95% confidence level. Our testing results do not show clear evidence that the liquidity of the currency pair affect the size of the forward rate bias which is consistent with our conjecture that symmetry between currency pairs limits the size of the forward rate bias even in the case of illiquid currencies.