Forward market efficiency and foreign exchange rate determination.

Persistent Link:
http://hdl.handle.net/10150/186807
Title:
Forward market efficiency and foreign exchange rate determination.
Author:
Lin, Jigeng.
Issue Date:
1994
Publisher:
The University of Arizona.
Rights:
Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
Abstract:
This dissertation studies the simple efficiency hypothesis, which states that the forward exchange rate is an unbiased and efficient predictor of the future spot exchange rate. This hypothesis has been extensively tested, and is overwhelmingly rejected. However, researchers are unable to determine the exact cause of rejections since it is the result of joint assumptions of risk neutrality and rational expectations. An interest rate differential model is developed assuming that the spot rate follows a random walk process and the covered interest rate parity condition holds. In this model, the spot rate is equal to the sum of the lagged forward rate and the interest rate differential, and a random error term. This model shows that the interest rate differential term belongs to the relationship between the spot and lagged forward rates, but it is not accounted for by the simple efficiency hypothesis. Therefore, the simple efficiency hypothesis is rejected because the interest rate differential term belongs to the spot and forward relationship rather than because of assumptions of risk neutrality or rational expectations. Empirical evidence supports this model using the exchange rates of the United Kingdom, Canada, Germany, Japan, and Switzerland versus the United States. Furthermore, the time series properties of interest rate differentials are sensitive to changes in monetary and fiscal policies. The interest rate differential is non-stationary, and the spot and forward rates are not cointegrated for samples between 1982 to 1993, which is a strong indication that the simple efficiency hypothesis is rejected because of interest rate differentials.
Type:
text; Dissertation-Reproduction (electronic)
Degree Name:
Ph.D.
Degree Level:
doctoral
Degree Program:
Economics; Graduate College
Degree Grantor:
University of Arizona
Committee Chair:
Taylor, Lester D.

Full metadata record

DC FieldValue Language
dc.language.isoenen_US
dc.titleForward market efficiency and foreign exchange rate determination.en_US
dc.creatorLin, Jigeng.en_US
dc.contributor.authorLin, Jigeng.en_US
dc.date.issued1994en_US
dc.publisherThe University of Arizona.en_US
dc.rightsCopyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.en_US
dc.description.abstractThis dissertation studies the simple efficiency hypothesis, which states that the forward exchange rate is an unbiased and efficient predictor of the future spot exchange rate. This hypothesis has been extensively tested, and is overwhelmingly rejected. However, researchers are unable to determine the exact cause of rejections since it is the result of joint assumptions of risk neutrality and rational expectations. An interest rate differential model is developed assuming that the spot rate follows a random walk process and the covered interest rate parity condition holds. In this model, the spot rate is equal to the sum of the lagged forward rate and the interest rate differential, and a random error term. This model shows that the interest rate differential term belongs to the relationship between the spot and lagged forward rates, but it is not accounted for by the simple efficiency hypothesis. Therefore, the simple efficiency hypothesis is rejected because the interest rate differential term belongs to the spot and forward relationship rather than because of assumptions of risk neutrality or rational expectations. Empirical evidence supports this model using the exchange rates of the United Kingdom, Canada, Germany, Japan, and Switzerland versus the United States. Furthermore, the time series properties of interest rate differentials are sensitive to changes in monetary and fiscal policies. The interest rate differential is non-stationary, and the spot and forward rates are not cointegrated for samples between 1982 to 1993, which is a strong indication that the simple efficiency hypothesis is rejected because of interest rate differentials.en_US
dc.typetexten_US
dc.typeDissertation-Reproduction (electronic)en_US
thesis.degree.namePh.D.en_US
thesis.degree.leveldoctoralen_US
thesis.degree.disciplineEconomicsen_US
thesis.degree.disciplineGraduate Collegeen_US
thesis.degree.grantorUniversity of Arizonaen_US
dc.contributor.chairTaylor, Lester D.en_US
dc.contributor.committeememberOaxaca, Ronald L.en_US
dc.contributor.committeememberHeckerman, Donald G.en_US
dc.contributor.committeememberKroner, Kenneth K.en_US
dc.contributor.committeememberGhose, Devajyotien_US
dc.identifier.proquest9502609en_US
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