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Tests of Efficiency in the Foreign Exchange Market

Author

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  • Ioannis N. Kallianiotis

    (Economics/Finance Department, The Arthur J. Kania School of Management, University of Scranton, Scranton, PA 18510-4602, U.S.A)

Abstract

The objective of this paper is to test the efficiency in the foreign exchange market by using four exchange rates ($/€, $/£, C$/$, and Â¥/$). Different theoretical models are applied, like the random walk hypothesis, the unbiased forward rate hypothesis, the composite efficiency hypothesis, the semi-strong market efficiency, and the exchange rate expectations based on anticipated and unanticipated events (“News†). If exchange rate efficiency does not hold, a risk premium must exist and can be measured. Also, the determination of this exchange risk premium is taking place by using a GARCH (p, q) model. The empirical results for these four major exchange rates (five currencies) show that relative efficiency exists, but there are significant risk premia for some exchange rates used, here.Â

Suggested Citation

  • Ioannis N. Kallianiotis, 2017. "Tests of Efficiency in the Foreign Exchange Market," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(10), pages 218-239, 10-2017.
    • Handle: RePEc:arp:ijefrr:2017:p:218-239
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    References listed on IDEAS

    as
    1. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
    2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    3. Peter Isard, 1980. "Factors determining exchange rates: the roles of relative price levels, balances of payments, interest rates and risk," BIS Working Papers 4, Bank for International Settlements.
    4. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
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    Cited by:

    1. Ioannis N. Kallianiotis, 2018. "Exchange Rate Expectations," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(2), pages 1-5.
    2. repec:spt:apfiba:v::y:2018:i::f:8_2_5 is not listed on IDEAS

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    More about this item

    Keywords

    Demand for Money and Exchange Rate; Foreign Exchange; Forecasting and Simulation; Information and Market Efficiency; International Financial Markets.;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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