A Note on the Foreign Exchange Market Efficiency Hypothesis: Does Small Sample Bias affect Inference?
AbstractThis study examines whether small sample bias affects the standard inference about the foreign exchange market efficiency hypothesis. Our findings indicate that the bias is large enough to result in rejection of the efficient market hypothesis even when it is true. We use bootstrapping to adjust for the bias and find that the hypothesis cannot be rejected for the Swiss franc and French franc. We also find that the bias plays a significant role in the inference that expectation error causes inefficiency in the foreign exchange markets. After bias adjustment, the rational expectation hypothesis holds even at one month-horizon.
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Bibliographic InfoPaper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2005-06.
Length: 22 pages
Date of creation: 27 Aug 2005
Date of revision:
Market Efficiency Hypothesis; Rational Expectation Hypothesis; Risk Premium; Small Sample Bias; Bootstrapping;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-06 (All new papers)
- NEP-CBA-2006-05-06 (Central Banking)
- NEP-FIN-2006-05-06 (Finance)
- NEP-FMK-2006-05-06 (Financial Markets)
- NEP-IFN-2006-05-06 (International Finance)
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