A Re-examination of the Fragility of Evidence from Cointegration- Based Tests of Foreign Exchange Market Efficiency

John Barkoulas and Christopher Baum

No 311., Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We re-examine Sephton and Larsen's (1991) conclusion that cointegration-based tests for market efficiency suffer from temporal instability. We improve upon their research by i) including a drift term in the vector error correction model (VECM) in the Johansen procedure, ii) correcting the likelihood ratio test statistic for finite-sample bias, and iii) fitting the model over longer data sets. We show that instability of the Johansen cointegration tests mostly disappears after accounting for these two factors. The evidence is even more stable in favor of no cointegration when we apply our analysis to longer data sets.

Keywords: cointegration; foreign exchange; market efficiency (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
Pages: 25 pages
Date: 1996-02-01
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Citations: View citations in EconPapers (6)

Published, Applied Financial Economics, 1997, 7:635-643.

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Journal Article: A re-examination of the fragility of evidence from cointegration-based tests of foreign exchange market efficiency (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:311

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