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New evidence on the rationality of exchange rate expectation

Fazlul Miah, M. Kabir Hassan (), M. Waheeduzzaman and Bassam Abual-Foul
Authors registered in the RePEc Author Service: Bassam Abu Al-Foul

Global Business and Economics Review, 2003, vol. 5, issue 2, 316-332

Abstract: This paper examines the Rational Expectation Hypothesis in the context of the foreign exchange market for the Australian Dollar, Canadian Dollar, and Swiss Frank against US Dollar using twelve years of monthly survey data. The study uses ADF and DF-GLS unit root tests, and applies the restricted cointegration test to assess the long-term relationship between the actual and the expected rates. One-month-ahead Australian Dollar and Swiss Frank expectations are rational, but not the Canadian Dollar. When forecast errors are corrected for serial correlation, three-month-ahead forecasts became rational for all currencies. None of the six and twelve-month-ahead forecasts are rational. Both the ADF and the DF-GLS tests provided fairly consistent results.

Keywords: Australian dollar; Canadian dollar; Swiss frank; US dollar; exchange rate expectation; foreign exchange market; exchange rate forecasting; exchange rates. (search for similar items in EconPapers)
Date: 2003
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Handle: RePEc:ids:gbusec:v:5:y:2003:i:2:p:316-332