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Using Survey Data to Test Market Efficiency in the Foreign Exchange Markets

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  • Liu, Peter C
  • Maddala, G S
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    Abstract

    This paper uses cointegration methods to test the market efficiency hypothesis (MEH) in the foreign exchange markets. Four exchange rates are considered--all relative to the U.S. dollar: British Pound, Deutsche Mark, Swiss Franc and Japanese Yen. Survey data on expectations are used to see whether the violation of the MEH is due to expectational errors or risk premia. The results differ for the one-week ahead and the one-month ahead forecasts. With the weekly data they conclude that it is risk premia, and with the monthly data it is both expectational errors and risk premia that account for the violation of the MEH. Given the volatility of the exchange markets, it appears that forecasts over an extended period fail tests of rationality, but one-week ahead forecasts do not fail such tests.

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    Bibliographic Info

    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 17 (1992)
    Issue (Month): 2 ()
    Pages: 303-14

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    Handle: RePEc:spr:empeco:v:17:y:1992:i:2:p:303-14

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    Cited by:
    1. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.
    2. Joachim Zietz & Ghassem Homaifar, 1994. "Exchange rate uncertainty and the efficiency of the forward market for foreign exchange," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(3), pages 461-475, September.
    3. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
    4. Raj Aggarwal & Brian M. Lucey & Sunil K. Mohanty, 2006. "The Forward Exchange Rate Bias Puzzle: Evidence from New Cointegration Tests," The Institute for International Integration Studies Discussion Paper Series iiisdp123, IIIS.
    5. Aggarwal, Raj & Mohanty, Sunil, 2000. "Rationality of Japanese macroeconomic survey forecasts: empirical evidence and comparisons with the US," Japan and the World Economy, Elsevier, vol. 12(1), pages 21-31, January.

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