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The Euro exchange rate efficiency and risk premium:an ecm model


  • Oreste Napolitano*
  • martin sola


  • fabio spagnolod


The purpose of this work is to investigate the efficiency of the current Euro spot and current forward exchange rates. Within the past three decades there have been large movements in the exchange rate markets and often these movements were not related with the changes in the “fundamentals” of the economy. On the other hand, the exchange rate market efficiency implies that, if the market is efficient, there is no remaining ex ante opportunities for making profits through speculation. Hence, testing for efficiency involves the joint hypothesis of a specific risk premium and rationality. We analysed the relationship between spot and forward rates of the Euro against the British pound and the US dollar. For one of the two exchange rates (EU/UK), we reject the hypothesis of efficiency and a further analysis on the presence of a risk premium shows that it is consistent and time varying.

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  • Oreste Napolitano* & martin sola & fabio spagnolod, 2002. "The Euro exchange rate efficiency and risk premium:an ecm model," Economics and Finance Discussion Papers 02-14, Economics and Finance Section, School of Social Sciences, Brunel University.
  • Handle: RePEc:bru:bruedp:02-14

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    1. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2014. "How Does Monetary Policy Change? Evidence On Inflation-Targeting Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 18(03), pages 593-630, April.
    2. Benati, Luca, 2008. "Investigating inflation persistence across monetary regimes," Working Paper Series 851, European Central Bank.
    3. Steinar Holden & John C. Driscoll, 2001. "A Note on Inflation Persistence," NBER Working Papers 8690, National Bureau of Economic Research, Inc.
    4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    5. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 1005-1060.
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