Testing the Efficiency of Thin Forward Foreign Exchange Markets: An Application of Instrumental Variable Multiple Regression with Integrated, I(1), Variables
This paper applies the recently developed asymptotic theory on instrumental variable estimation of multivariate cointegrating regression by Phillips and Hansen (1990) to test the efficiency of three thin forward markets, i.e., the markets for two-, six- and twelve-month forward foreign exchange. The procedure involves semi-parametric corrections not only for long-run endogeneity but also for heteroskedasticity and serial correlation. The results suggest that when constant, time and polynomial trends are used as instruments, the unbiasedness hypothesis can be rejected for all the forward contract maturities. However, when sinusoidal instruments are added it is not possible to reject the hypothesis for most of the two-month forward exchange rates. Copyright 1992 by Blackwell Publishers Ltd and The Victoria University of Manchester
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Volume (Year): 60 (1992)
Issue (Month): 2 (June)
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