Cointegration and market efficiency
Article Abstract:
Asset prices determined in efficient markets can be cointegrated, depending on the relevant model sought. With market efficiency defined as the lack of arbitrage opportunities, no general equivalence between market inefficiency and cointegration is found. A calculation showing the cointegrating vector is presented. With cross exchange rates excluded from an analysis of the cointegration of exchange rates, whether exchange rates are cointegrated or not can still be consistent with market effiency.
Publication Name: Journal of International Money and Finance
Subject: Economics
ISSN: 0261-5606
Year: 1992
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Rationality of survey data and tests for market efficiency in the foreign exchange markets
Article Abstract:
The rational expectations hypothesis (REH) and the market efficiency hypothesis (MEH) are tested in the foreign exchange markets using the cointegration theory. Survey data on expectations concerning the British pound, German mark, Swiss franc and Japanese yen are used. Spot exchange rates, expected exchange rates and the forward rates are found to follow a random walk process. All the test results support the REH, but not the MEH. The causes behind the failure of the MEH are explained.
Publication Name: Journal of International Money and Finance
Subject: Economics
ISSN: 0261-5606
Year: 1992
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Cointegration tests of a long-run relation between money demand and the effective exchange rate
Article Abstract:
A study was conducted to determine the effect changes in the exchange rate has over money supply. The demand functions - M1 and M2, and other indicators of money supply were subjected to implement tests of cointegration. It was found that changes in the exchange rate affects the M2 variable of money supply. This lends credence to the theory of Ronald McKinnon concerning currency substitution.
Publication Name: Journal of International Money and Finance
Subject: Economics
ISSN: 0261-5606
Year: 1992
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