Time varying forex market inefficiency
AbstractResearchers gathered abundant evidence on foreign exchange market inefficiency by regressing excess returns on lagged forward premia but they rarely investigated coefficient instability and its consequences for market efficiency testing. We allow for endogenous changes in the parameters when estimating by using rolling regressions and a Kalman Filter algorithm. Time variation in the regression coefficients is found to be statistically significant. If the regression parameters have changed over time, estimation methods that assume constant parameters may be inappropriate. We argue that the observed time variation in the forward premium slope is so large that a negative OLS slope for the post-Bretton Woods sample size is not improbable.
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Bibliographic InfoPaper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0063.
Date of creation: 1998
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Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-03-14 (All new papers)
- NEP-CBA-2002-03-14 (Central Banking)
- NEP-FMK-2002-03-14 (Financial Markets)
- NEP-IFN-2002-03-14 (International Finance)
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