Foreign exchange market efficiency and cointegration

Montserrat Ferré and Stephen Hall

Applied Financial Economics, 2002, vol. 12, issue 2, 131-139

Abstract: The analysis of market efficiency in the foreign exchange market adopted a new approach after Granger (Oxford Bulletin of Economics and Statistics, 48(3), 1986) stated that assets in an efficient market could not be cointegrated. If they were, there would be a market inefficiency since there would be Granger causality running at least in one direction and thus one price could be used to forecast the other. The interpretation that the literature has given to the relationship between cointegration and market efficiency has been that noncointegration is a necessary and sufficient condition for market efficiency. In the authors' opinion, the fact that two spot exchange rates are cointegrated does not necessarily imply that inefficiency exists. In this article, it is argued that when the economy is composed of N exchange rates and the closed system is analysed without dynamics, as it is the case when considering the no-arbitrage condition, the Granger Representation Theorem (GRT) does not tell one anything about efficiency. Further, when a subset J of the N exchange rates is considered, then the GRT becomes irrelevant for efficiency. To illustrate these hypotheses will be the objective of this article along with that of developing a framework to test for efficiency when cointegration is present.

Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603100110090055 (text/html)
Access to full text is restricted to subscribers.

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:taf:apfiec:v:12:y:2002:i:2:p:131-139

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603100110090055

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().