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An International Study of Efficiency and Risk in Money Markets

Author

Listed:
  • David Miles

    (Imperial College, University of London, London SW7, UK;
    Merrill Lynch, 25 Ropemaker St., London EC2Y 9LY, UK)

Abstract

There is a huge literature on whether forward rates of interest provide unbiased estimates of future interest rates. In most studies econometric evidence is presented which is apparently inconsistent with market efficiency; but more rarely is the economic, as opposed to statistical, significance of deviations from efficiency investigated. This paper uses accurate, up-to-date information on short term money market rates, from a common source, for all the major economies to assess efficiency and profit opportunities. The economic significance of deviations from the conditions required for efficiency are assessed by testing various trading rules.The paper explores the potential to make profits from money market transactions based on simple rules derived from econometric analysis of the relation between current and future interest rates. We find that in many cases there are systematic divergences between forward rates and future spot interest rates for various currencies quoted on the London interbank market.

Suggested Citation

  • David Miles, 1998. "An International Study of Efficiency and Risk in Money Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 389-424.
    • Handle: RePEc:wsi:ijtafx:v:01:y:1998:i:03:n:s0219024998000229
    DOI: 10.1142/S0219024998000229
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    More about this item

    Keywords

    Forward rates; market efficiency; profit opportunities; JEL Classification: E43; G14; G15;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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