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Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Foreign Exchange Rate Market

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  • Graham Elliott
  • Takatoshi Ito

Abstract

This paper examines the efficiency of the forward yen/dollar market using micro survey data. We first argue that the conventional tests of efficiency (unbiasedness) of the forward rate or of the survey forecasts do not correspond directly to the zero-profit condition. Instead, we use the survey data to calculate directly potential profits of individual forecasters based on a natural trading rule. We find that although the survey data are not the best predictor of future spot rate in terms of typical mean square forecast error criteria, the survey data can be used to obtain on average positive profits. However, these profits are small and highly variable. We also examine profits generated by a trading rule using regression forecasts, where forward premium is an explanatory variable. These profits are also small and highly variable.

Suggested Citation

  • Graham Elliott & Takatoshi Ito, 1995. "Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Foreign Exchange Rate Market," NBER Working Papers 5376, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5376
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    References listed on IDEAS

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    Cited by:

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    2. Peter Christoffersen & Francis X. Diebold, 2002. "Financial Asset Returns, Market Timing, and Volatility Dynamics," CIRANO Working Papers 2002s-02, CIRANO.
    3. Sonia Pangusión Espinosa., "undated". "Testing Uncovered Interest Rate Parity: The Spanish case," Studies on the Spanish Economy 128, FEDEA.
    4. Sergey V. Chernenko, 2004. "The information content of forward and futures prices: market expectations and the price of risk," International Finance Discussion Papers 808, Board of Governors of the Federal Reserve System (U.S.).
    5. Reitz, Stefan & Ruelke, Jan & Stadtmann, Georg, 2009. "Are oil-price-forecasters finally right? -- Regressive expectations towards more fundamental values of the oil price," MPRA Paper 15607, University Library of Munich, Germany.
    6. Peter F. Christoffersen & Francis X. Diebold, 2006. "Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics," Management Science, INFORMS, vol. 52(8), pages 1273-1287, August.
    7. Marcin Gruszczyński, 2007. "Repression versus free and controlled market. Research into the (weak) effectiveness of the Polish foreign currency (US dollar/zloty) market over the years 1983–1989 and 1991–2006," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 19.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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