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The foreign exchange market efficiency hypothesis revisited

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  • Swarna Dutt
  • Dipak Ghosh

Abstract

The foreign exchange market efficiency hypothesis is revisited using the modern Phillips-Hansen Fully Modified Ordinary Least squares (FM-OLS) procedure. It corrects for both endogeneity in the data and asymptotic bias in the coefficient estimates. The volatile decade of the 1980s is the chosen sample. The necessary and sufficient condition for market efficiency/unbiasedness is tested by sequentially conducting the Phillips-Ouliaris non-stationarity test on the residuals and the FM-WALD test for the required parameter values. Across the board evidence is found supporting cointegration between future spot rates and forward rates, i.e. the necessary condition is satisfied. But both the necessary and sufficient condition is supported for two out of four currencies, presumably due to the presence of the risk premium and/or market imperfections.

Suggested Citation

  • Swarna Dutt & Dipak Ghosh, 1995. "The foreign exchange market efficiency hypothesis revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 2(9), pages 311-315.
    • Handle: RePEc:taf:apeclt:v:2:y:1995:i:9:p:311-315
    DOI: 10.1080/135048595357131
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    Cited by:

    1. Buiter, Willem, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
    2. Buiter, Willem H., 2000. "Optimal currency areas: why does the exchange rate regime matter? (with an application to UK membership in EMU)," LSE Research Online Documents on Economics 20178, London School of Economics and Political Science, LSE Library.
    3. A. Tahai & Robert Rutledge & Khondkar Karim, 2004. "An examination of financial integration for the group of seven (G7) industrialized countries using an I( ) cointegration model," Applied Financial Economics, Taylor & Francis Journals, vol. 14(5), pages 327-335.
    4. Swarna Dutt & Dipak Ghosh, 1999. "An empirical examination of exchange market efficiency," Applied Economics Letters, Taylor & Francis Journals, vol. 6(2), pages 89-91.

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