The Instability of the Forward Rate Anomaly: Easy Money Was Always Too Good To Be True Available to Purchase

The paper checks the Bilson-Fama regression for discrete points of structural change. We find greater instability than previous studies and a forward rate bias that is more often insignificant or positive than negative as widely reported. We also find considerably more evidence of a time-varying risk premium. Systematic forecasting errors also play a key role, but the correlations are unstable and switch sign across many of the subperiods. The results present a challenge for the view that currency markets are systematically irrational.