Some joint tests of market efficiency: The case of the forward premium
AbstractThe rational expectations model of the term structure is applied to the forward premium on foreign exchange. The model has been previously considered by Hakkio (1981) as a test of a form of market efficiency. Rejection of the model can be due to a failure of the rational expectations hypothesis of the term structure of either the domestic or foreign bond markets, or due to a breakdown of covered interest parity. One- and three-month forward premiums, for three separate currencies, are modeled as unrestricted vector autoregressions, and parametric expressions are derived for a Wald test statistic and an asymptotically efficient two-step estimator of the restricted model. The resulting Wald and Likelihood Ratio statistics give rise to a rejection of the model for all three currencies.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 7 (1985)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/622617
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- Drakos, Konstantinos, 2003. "The term structure of deviations from the interest parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(1), pages 57-67, February.
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