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Testing for foreign exchange market efficiency - a trivariate vector autoregressive approach

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  • Chyng-Hua Shen

Abstract

The speculative efficiency of the forward exchange market for the British pound, Canadian dollar, German mark, Japanese yen and Swiss franc is evaluated in this study. The conventional approach of selecting spot and one-forward exchange rates is extended towards spot and two-forward exchange rates to consider the interactions among exchange rates of different contracts of different maturities. The possible cointegration of three series forms an error correction mechanism. Thus Campbell and Shiller's (1987) bivariate vector autoregressive model is extended to a trivariate VAR (TVAR) based on the error correction mechanism. A Wald test (with and without considering heteroscedasticity) is finally performed to examine the validity of the cross-equation restrictions. The speculative efficient market is rejected for the forward exchange market for the five currencies under study.

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  • Chyng-Hua Shen, 1997. "Testing for foreign exchange market efficiency - a trivariate vector autoregressive approach," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 711-719.
    • Handle: RePEc:taf:apfiec:v:7:y:1997:i:6:p:711-719
    DOI: 10.1080/758533864
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