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Foreign Exchange Market Efficiency: Did The Ems Make a Difference? A Cointegration-Based Empirical Investigation

Author

Listed:
  • Tronzano, Marco

    (Università degli Studi di Genova, Dipartimento di Economia e Metodi Quantitativi)

Abstract

This paper addresses an interesting theoretical intuition, originally put forward in De Grauwe (1989), according to which market efficiency should find stronger support in a pegged exchange rate regime rather than in a purely floating context. A cointegration-based empirical investigation on the French Franc/Deutsche Mark exchange rate and two outstanding floating rates (DM1 U$, Yen/U$) strongly supports the above intuition. As revealed by cointegration tests, a necessary condition for market efficiency is uniformly supported across alternative exchange rate regimes. Forward unbiasedness tests, however, point out that only inside the EMS is a sufficient condition for foreign exchange market efficiency satisfied. The above conclusion is robust to alternative methodologies to test restrictions on parameters and has relevant implications on a large strand of applied literature assessing EMS credibility.

Suggested Citation

  • Tronzano, Marco, 2002. "Foreign Exchange Market Efficiency: Did The Ems Make a Difference? A Cointegration-Based Empirical Investigation," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 55(1), pages 69-103.
    • Handle: RePEc:ris:ecoint:0199
    as

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    More about this item

    Keywords

    Market Efficiency; Forward Rate Unbiasedness; Cointegration; EMS;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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