Efficiency and Expectations Revisited: A Foreign Exchange Market with Bayesian Players

Nicos Christodoulakis, Sarantis Kalyvitis and Nick Karamouzis

No 1016, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper re-examines the efficiency hypothesis in the foreign exchange market. The traditional efficiency testing equations are reviewed and a model is developed that incorporates Bayesian revisions in the form of devaluation expectations. A number of propositions regarding the pattern of the coefficients in efficiency testing equations are established. The results are confirmed by the empirical estimation of the model for the Greek foreign exchange market.

Keywords: Bayesian Learning; Devaluation; Efficiency; Expectations; Unbiasedness (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 1994-09
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