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Time varying forex market inefficiency

Author

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  • Koning, Camiel de

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Straetmans, Stefan

Abstract

Researchers 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.

Suggested Citation

  • Koning, Camiel de & Straetmans, Stefan, 1998. "Time varying forex market inefficiency," Serie Research Memoranda 0063, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    • Handle: RePEc:vua:wpaper:1998-63
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    References listed on IDEAS

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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