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Efficiency and News in Exchange Rate Market. The Euro/Dollar Case

TL;DR: 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.

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Citations
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31 Oct 2014
TL;DR: The Prime Journal of Business Administration and Management (PMBAM) as discussed by the authors is a journal that covers all areas of BAM such as general management, business law, public responsibility and ethics, marketing theory and applications, business finance and investment, general business research, business and economics education, production/operations management, organizational behavior and theory, strategic management policy, social issues and public policy, management organization, statistics and econometrics, personnel and industrial relations, technology and innovation, case studies, and management information systems.
Abstract: Prime Journal of Business Administration and Management encompasses all areas of Business Administration and Management such as general management, business law, public responsibility and ethics, marketing theory and applications, business finance and investment, general business research, business and economics education, production/operations management, organizational behavior and theory, strategic management policy, social issues and public policy, management organization, statistics and econometrics, personnel and industrial relations, technology and innovation, case studies, and management information systems.

7 citations

01 Jan 2012
TL;DR: In this paper, the authors examined the efficient market hypothesis in Iranian foreign exchange market during time period 21:03:2002-17:06:2010 by using Detrended Fluctuation Analysis (DFA) technique as well as unit root tests including Augmented Dickey Fuller (ADF) and Philips-Peron (PP).
Abstract: According to Efficient Market Hypothesis (EMH) prices completely reflect all available information. Under this condition, it is not possible to speculators to predict the future behavior of asset prices and to earn excess profits in a systematic manner. This study examines efficient market hypothesis in Iranian foreign exchange market during time period 21:03:2002-17:06:2010 by using Detrended Fluctuation Analysis (DFA) technique as well as unit root tests including Augmented Dickey Fuller (ADF) and Philips-Peron (PP). Results indicate that the market was weakly efficient during the selected time period. However, it seems that this efficiency is not due to informed behavior of traders but foreign exchange interventions under managed floating regime. In case that the government adopts floating exchange rate regime in the future, prominent acting of the informed speculators and making depth of the foreign exchange market may prevent dramatic foreign exchange market inefficiency and its consequences.

2 citations

DOI
20 Jan 2013
TL;DR: In this article, the authors present a list of the most important factors that influence the performance of a user's interaction with a service provider and the quality of service provided by the service provider.
Abstract: بر اساس فرضیه بازار کارا، قیمت‌ها به‌طور کامل اطلاعات در دسترس را منعکس می‌کنند. در این شرایط، برای سفته بازان امکان پیش بینی رفتار آتی قیمت دارایی و کسب سودهای اضافی به صورت سیستماتیک وجود ندارد. مطالعه حاضر فرضیه بازار کارا در بازار ارز ایران را طی دوره زمانی 1/1/1381 تا 27/3/1389 با استفاده از تکنیک آنالیز نوسانات روند زدایی شده (DFA) و آزمون‌های ریشه واحد دیکی فولر تعمیم یافته (ADF) و فیلیپس- پرون (PP) آزمون می‌کند. نتایج نشان می‌دهد که بازار ارز ایران در دوره منتخب دارای کارایی شکل ضعیف است. به هر حال، به نظر می‌رسد کارایی بازار ارز ایران بیش از آن که زاییده رفتار آگاهانه معامله گران باشد ناشی از مداخلات ارزی تحت نظام ارزی شناور مدیریت شده است. در صورتی که دولت بخواهد در آینده به اتخاذ نظام ارزی شناور روی آورد حضور غالب سفته بازان آگاه و عمق بخشی به بازار ارز می‌تواند جلوی بروز ناکارایی‌های شدید بازار ارز و پیامدهای ناشی از آن را بگیرد.
Posted Content
TL;DR: In this article, the authors explain the role of speculators in determining the 1992 ERM crisis and the effects that the policy of maintaining external parity had on internal growth, focusing on a different way through which expectations are formed about the macroeconomic fundamentals independently of the behaviour of the monetary policy.
Abstract: This paper attempts to explain the importance of the role of the speculators in determining the 1992 ERM crisis, and the effects that the policy of maintaining external parity had on internal growth. We focus on a different way through which expectations are formed about the macroeconomic fundamentals independently of the behaviour of the monetary policy. In the present model, agents’ rational beliefs do not emerge from arbitrary circumstances but only when the value of the exchange rate, kept under control by the central bank, did not correspond to the expected value and to the current wide-spread beliefs in the market.
References
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ReportDOI
TL;DR: In this paper, the forward exchange rate provides an "optimal" forecast of the future spot ex-change rate, for five currencies relative to the dollar, using two distinct, but related, approaches.
Abstract: This paper provides an empirical examination of the hypothesis that the forward exchange rate provides an "optimal" forecast of the future spot ex-change rate, for five currencies relative to the dollar. This hypothesis provides a convenient norm for examining the erratic behavior of exchange rates; this erratic behavior represents an efficient market that is quickly incorporating new information into the current exchange rate. This hypothesis is analyzed using two distinct, but related, approaches. The first approach is based on a regression of spot rates on lagged forward rates. When using weekly data and a one month forward exchange rate, ordinary least squares regression analysis of market efficiency is incorrect. Econometric methods are proposed which allow for consistent (though not fully efficient) estimation of the parameters and their standard errors. This paper also presents a new approach for testing exchange market efficiency. This approach is based on a general time series process generating the spot and forward exchange rate. The hypothesis of efficiency implies a set of cross-equation restrictions imposed on the parameters of the time series model. This paper derives these restrictions, proposes a maximum likelihood method of estimating the constrained likelihood function, estimates the model and tests the validity of the restrictions with a likelihood ration statistic.

139 citations


"Efficiency and News in Exchange Rat..." refers background in this paper

  • ...2 Hakkio, 1981; MacDonald 1983, Hodrick and Srivastava, 1984; Domowitz and Hakkio, 1984; Fama, 1984; Taylor, 1988; Corbae et al., 1992, 3 Frenkel 1980, Longworth 1981, Hakkio and Rush, 1989; Baillie and Bollerslev, 1989; Lai and Lai, 1991; Masih and Masih, 1995 To estimate the presence of news we…...

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Journal ArticleDOI
TL;DR: In this paper, the simple efficiency hypothesis was tested under a large class of heteroscedasticity, and a set of data which took into account the institutional features of the forward exchange market.

135 citations

Journal ArticleDOI
TL;DR: In this article, the authors describe how economic theories can be tested from vector time series models using cointegration and the concept of co-integration in the modeling and testing procedure.
Abstract: Many economic theories give rise to restrictions between the future rational expectations of a set of variables. This paper describes how such theories can be tested from vector time series models. Particular attention is given to problems of nonstationarity and the use of the concept of cointegration in the modeling and testing procedure.

133 citations

Posted Content
TL;DR: The authors summarizes the results of an empirical study of the operation of flexible exchange rates during the 1920's under both the hyperinflationary conditions and under the normal conditions (based on the experience of Britain, the United States and France).
Abstract: This paper summarizes the results of an empirical study of the operation of flexible exchange rates during the 1920's under both the hyperinflationary conditions (based on the experience of Germany) and under the normal conditions (based on the experience of Britain, the United States and France).Section I deals with some general characteristics of the market for foreign exchange by examining the relationship between spot and forward exchange rates. Section II deals with the relationship between exchange rates and prices by examining aspects of the purchasing power parity doctrine. Section III deals with the determinants of exchange rates within the context of a simple monetary model.

129 citations


"Efficiency and News in Exchange Rat..." refers background or methods in this paper

  • ...In fact we take the equation s t+ j -s t = α + β(E t s t+ j -s t ) + γnews t+ j + µ t+ j [13] following the ‘news’ model proposed by Frenkel (1980, 1981) and modified by Apergis and Eleftheriou (1997) into the equation [14]6: (st+i-st) = α + β(Ft-st) +γnewst+i + µt+i [14] We then use the residuals…...

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  • ...2 Hakkio, 1981; MacDonald 1983, Hodrick and Srivastava, 1984; Domowitz and Hakkio, 1984; Fama, 1984; Taylor, 1988; Corbae et al., 1992, 3 Frenkel 1980, Longworth 1981, Hakkio and Rush, 1989; Baillie and Bollerslev, 1989; Lai and Lai, 1991; Masih and Masih, 1995 To estimate the presence of news we…...

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ReportDOI
TL;DR: In this article, an empirical study of the operation of flexible exchange rates during the 1920's under both the hyperinflationary conditions (based on the experience of Germany) and under the normal conditions was conducted.
Abstract: The experience with flexible exchange rates during the 1920's has proven to be extremely important in shaping our current thinking about a variety of issues including the choice among alternative exchange rate regimes, the role of speculation in the market for foreign exchange, the purchasing power parity doctrine, and the determinants of equilibrium exchange rates. Probably no event in monetary history has been studied more closely than the German hyperinflation. Economists have been attracted to study this episode since it provides an environment that is close to a controlled experiment which is so rare in the study of social sciences. It also provides a convenient starting point for the reexamination of theories in circumstances in which the predominant disturbance is of a monetary origin. However, interest in the experience with flexible exchange rates during the 1920's is not confined only to the lessons from the German hyperinflation. From the viewpoint of economic research, that experience provides also the opportunity to conduct a comparative study of the operation of flexible exchange rates under "normal" conditions. Specifically, until the return to gold by Britain (in 1925), many countries adopted a flexible exchange rate system. This system was successful in insulating most of the world from the direct consequences of the extraordinary German hyperinflation of 1921-23. Thus, during the same period in which Germany was experiencing the hyperinflation, much of the rest of the world was operating under practically "normal" conditions. This paper summarizes the results of an empirical study of the operation of flexible exchange rates during the 1920's under both the hyperinflationary conditions (based on the experience of Germany) and under the normal conditions (based on the experience of Britain, the United States and France). Section I deals with some general characteristics of the market for foreign exchange by examining the relationship between spot and forward exchange rates. Section II deals with the relationship between exchange rates and prices by examining aspects of the purchasing power parity doctrine. Section III deals with the determinants of exchange

110 citations