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Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914

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Author Info
Komlos, John
Flandreau, Marc

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Abstract

We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a “shadow” gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 8.

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Date of creation: Nov 2006
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Handle: RePEc:lmu:muenec:8

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Related research
Keywords: exchange rate; gold standard; ARIMA; efficiency;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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  1. John Komlos & Marc Flandreau, . "Core or Periphery? The Credibility of the Austro-Hungarian Currency, 1867-1913," Articles by John Komlos 4, Department of Economics, University of Munich. [Downloadable!]
  2. Flandreau, Marc & Komlos, John, 2001. "How to Run a Target Zone? Age Old Lessons from an Austro-Hungarian Experiment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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