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Efficiency and News in Exchange Rate Market. The Euro/Dollar Case
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In this article, the authors examine the theoretical points that constitute literature on exchange rate market efficiency and show the importance of the news in determining short-run movements in the exchange rate markets.Abstract:
The aim of the paper is twofold: the first one is to examine the theoretical points that constitute literature on exchange rate market efficiency. We give a quick look to the long run, in which high or low efficiency results from the adjustment velocity of prices and production in goods market. We then go to examine literature conclusions about the short run. The second aim is to test the efficiency for the US dollar against the Euro foreign exchange market with anews' exchange rate model using daily data over a period of 19 months. In the model we use, as proxies of 'news', variables generated by the residuals from a VAR model. Our results are consistent with the hypothesis that the forward exchange rate is not an unbiased predictor of the future spot rate. That is, we reject the hypothesis of efficiency and we show the importance of the 'news' in determining short-run movements in the exchange rate markets. The general conclusion we reach is that the euro dollar exchange rate market, from its birth to august 2000, is not efficient because expectations could not be rational, i.e. operators cannot predict risks coming from stock exchange and from uncertainty on future values of economic variables.read more
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Prime Journal of Business Administration and Management
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References
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Journal ArticleDOI
Exchange Rate Economics: Where Do We Stand?
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An Investigation of Risk and Return in Forward Foreign Exchange
TL;DR: In this paper, the authors examined the determination of risk premiums in foreign exchange markets and found that there is evidence for heteroskedasticity and that the conditional expectation of the risk premium is a nonlinear function of the forward premium.
Journal ArticleDOI
An Investigation of Risk and Return in Forward Foreign Exchange
TL;DR: In this article, the authors examined the determination of risk premiums in foreign exchange markets and found that the conditional expectation of the risk premium is a nonlinear function of the forward premium.
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Exchange Rate Economics: Where Do We Stand?
TL;DR: The authors discusses the exchange rate economics and empirically tests the explanatory power of theory using the dollar-mark exchange rate using the explanatory variables are relative nominal money supplies, relative real income levels, and nominal long-term and short-term interest differentials.
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Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange
TL;DR: In this paper, a new interpretation to the appearance, in the early 1980s, of systematic errors in forecasting the dollar exchange rate is presented, where market participants revise their beliefs about the process using Bayes' Rule.
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