Exchange Rate Market Efficiency Tests and Cointegration Analysis

Giulio Cifarelli ()

Economia Internazionale / International Economics, 1992, vol. 45, issue 2, 197-208

Abstract: Exchange rate market efficiency tests have been strongly influenced by the finding that the exchange rate time series are mostly nonstationary. The early efficiency tests — which tended to support the hypothesis of interest — have been found to be incorrect and have been replaced by new tests which strongly reject the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate. In this paper we suggest a possible interpretation of these findings with the help of cointegration analysis and show that the empirical evidence on the unbiased efficiency hypothesis is still controversial, since the theory of efficient markets does not accommodate well to the short run versus long run distinction.

Date: 1992
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