Measuring excess-predictability of asset returns and market efficiency over time

Richard Levich, Thomas Conlon and Valerio Potì

Economics Letters, 2019, vol. 175, issue C, 92-96

Abstract: We build on the predictability bounds of Huang and Zhou (2017) and Potì (2018) to develop an index of informational market inefficiency. This index takes values given by the levels of relative risk aversion (RRA) of the marginal investor such that, net of sampling error at a given confidence level, the observed predictability does not exceed the predictability bound. We demonstrate the usefulness of our index in a study of the predictability of forward exchange rates of currencies of emerging and developed economies from 1994 to 2016, to shed light on how the efficiency of currency markets has evolved over this time. We find widespread evidence of excess-predictability, hence currency market inefficiency, in the early part of the sample period and then at specific times, such as the recent global financial crisis. In the more recent part of the sample period, the evidence of excess-predictability is largely limited to emerging market currencies.

Keywords: Return predictability; Market efficiency; Predictability bounds (search for similar items in EconPapers)
JEL-codes: F31 G1 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176518305147
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:175:y:2019:i:c:p:92-96

DOI: 10.1016/j.econlet.2018.12.022

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().