Some joint tests of market efficiency: The case of the forward premium

Richard T. Baillie and Patrick C. McMahon

Journal of Macroeconomics, 1985, vol. 7, issue 2, 137-150

Abstract: The rational expectations model of the term structure is applied to the forward premium on foreign exchange. The model has been previously considered by Hakkio (1981) as a test of a form of market efficiency. Rejection of the model can be due to a failure of the rational expectations hypothesis of the term structure of either the domestic or foreign bond markets, or due to a breakdown of covered interest parity. One- and three-month forward premiums, for three separate currencies, are modeled as unrestricted vector autoregressions, and parametric expressions are derived for a Wald test statistic and an asymptotically efficient two-step estimator of the restricted model. The resulting Wald and Likelihood Ratio statistics give rise to a rejection of the model for all three currencies.

Date: 1985
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164-0704(85)80001-X
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:jmacro:v:7:y:1985:i:2:p:137-150

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().