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Heterogeneous expectations and tests of efficiency in the yen/dollar forward exchange rate market

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  • Elliott, Graham
  • Ito, Takatoshi

Abstract

This paper examines the efficiency of the forward yen/dollar market using micro survey data. Conventional tests of unbiasedness do not correspond directly to the zero-profit condition. Instead, we use the survey data to calculate potential profits of individual forecasters based on a natural trading rule. We find that although the survey data are not the best predictor of future spot rates in terms of typical mean square forecast error criteria, the survey data can be used to obtain on average positive profits. However, these profits are small and highly variable. Similar results are found when we examine profits generated by a trading rule using regression forecasts. The profits are found to be correlated with risk type variables but not other available information

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 43 (1999)
Issue (Month): 2 (April)
Pages: 435-456

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Handle: RePEc:eee:moneco:v:43:y:1999:i:2:p:435-456

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Web page: http://www.elsevier.com/locate/inca/505566

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  17. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  18. Cumby, Robert E., 1988. "Is it risk? : Explaining deviations from uncovered interest parity," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 279-299, September.
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