A Study of the Efficiency in Four Foreign Exchange Markets Using the Survey Data

• Main Author: Zhu, Jiamei
• Format: Others
• Published: TopSCHOLAR® 1996
• Subjects: Economics
• Online Access: http://digitalcommons.wku.edu/theses/862; http://digitalcommons.wku.edu/cgi/viewcontent.cgi?article=1865&context=theses

The purpose of this paper is to reexamine the efficiency condition in four foreign exchange market: U.S.—British, U.S.—Canadian, U.S.—Japanese, U.S.—German. Survey data was used to separate the risk premium arguments from irrationality. Only two markets are considered efficient based on the statistical test: U.S.—Canadian, U.S.—Japanese. Three models were conducted to explain the risk premium which is the factor causing the bias between the forward and the spot rate in the U.S.—German and the U.S.-Japanese markets. Lag Model (Model 2) turns out to be the only model that can explain the risk condition in the U.S.—Japanese market. All the three tested models could to some degree explain the risk condition in the U.S.—German market. Further analysis shows model (la) is the best.