Cointegration and forward and spot exchange rate regressions

We investigate the relationship between cointegration models of the current spot exchange rate, s(t), and the current forward rate, f(t), and cointegration models of the future spot rate, s(t+1), and f(t) and the implications of this relationship for tests of the forward rate unbiasedness hypothesis (FRUH). We show that simple models of cointegration between s(t) and f(t) imply complicated models of cointegration between s(t+1) and f(t). Consequently, standard methods are often inappropriate for modeling the cointegrated behavior of(s(t+1), f(t))' and we show that the use of such methods can lead to erroneous inferences regarding the FRUH. (C) 2000 Elsevier Science Ltd. All rights reserved. JEL classification: C32; F31.