On the Robustness of Cointegration Tests of the Market Efficiency Hypothesis: Evidence from Six European Foreign Exchange Markets

Abul Masih and Rumi Masih ()
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Rumi Masih: Goldman Sachs Asset Management, Postal: 5 Broad Street New York NY 10004 USA , ,, http://www2.goldmansachs.com/

Economia Internazionale / International Economics, 1994, vol. 47, issue 2-3, 160-180

Abstract: By using Johansen's multivariate co integration procedural, six European spot forward exchange rates are used to test f or the market efficiency hypothesis under three different exchange rate regimes. Although the co integration technique is b extensively used for hypothesis testing of a similar nature, vary little work has been done to substantiate the results derived from this technique either with respect robustness of modal specification or sample stability. The paper highlights this a by providing: emphasis upon the international properties of the data via a menu unit root tests; iterative tests for the number of co integrating vectors over the floating period; and extends the analysis to construct multi-dimensional models in an examination of both spot and forward market efficiency between all the European currencies. The evidence is not supportive of the unbiasedness condition and hence market efficiency inside any of the European exchange markets. However, tests are across alternative spot/forward rate combinations exhibited efficiency for ma of the bilateral relationships over the floating regime. Moreover, results seem to be robust across different exchange rate regimes, model specifications and over time.

Date: 1994
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