Essays in foreign exchange market efficiency conditions and implications from asset pricing models.

摘要

In the field of exchange rate economics a research puzzle exits. Briefly, the puzzle arises when a researcher regresses the change in a spot exchange rate on a constant and the forward premium. The coefficient of the forward premium is often negative and almost always significantly different from +1. This implies that the forward premium mispredicts the direction of subsequent change in the spot rate. This result contradicts the basic premise of the efficient market hypothesis that the forward rate is the best predictor of the future spot rate.; The first objective of the study is to estimate an alternative version of the weak efficient market hypothesis using an error correction model (ECM). The results from our ECM model indicate that we cannot reject the forward rate unbiasedness hypothesis for any foreign exchanges. On the other hand the joint hypothesis is accepted in some cases while rejected for some currencies.; Second, we implement an intertemporal asset-pricing model under non-expected utility. This type of model can incorporate a time varying risk premium, under rational expectations in asset market return. The results indicate that overall we cannot reject the null hypothesis of a set of optimizing conditions of a risk-averse agent who allocates his savings and consumption among risky currency returns. The results are, however, sensitive to estimation issues.; Finally, we show empirical evidence that foreign exchange rates are stationary once structural breaks are taken into account. We incorporate the structural break in the WEMH model by using a time-varying regression approach. Our results indicate that the forward rate unbiasedness hypothesis is not rejected for any currencies. However, the joint hypothesis is still a suspect.; Finally, we argue that the common assumption that the spot and forward rates are unit root processes may not be correct. We show that after accounting for relevant structural breaks and stochastic unit root processes in the series, foreign exchange rates are not unit root or non-stationary processes. Thus, the automatic first difference version is grossly misspecified. Using this result as a background we suggest a modified version of the efficient market hypothesis.