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Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Exchange rate Market

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Listed:
  • Graham Elliott
  • Takatoshi Ito

Abstract

This paper examines the efficiency of the forward yan/dollar market using micro survey data. Conventional tests of unbiasedness do not correspond directly to the zero-profit condition. Instead, we use the survey data to calculate potential profits of individual forecasters based on a natural trading rule.We find that although the survey data are not the best predictor of future spot rates in terms of typical mean square forecast error criteria, the survey data can be used to obtain on average positive profits. However, these profits generated by a trading rule using regression forecasts. The profits are found to be correlated with risk type variables but not other available information.

Suggested Citation

  • Graham Elliott & Takatoshi Ito, 1998. "Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Exchange rate Market," Discussion Paper Series a347, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:a347
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    More about this item

    Keywords

    Foreign exchange rate; Expectations; Forward rate; and Efficient markets.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F15 - International Economics - - Trade - - - Economic Integration

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