Working Paper: CEPR ID: DP627
Authors: Juan Ayuso; Juan J. Dolado; Simón Sosvillarivero
Abstract: This paper applies recent cointegration techniques to analyse whether the forward market for the peseta/US dollar is efficient in both the one-month and the three-month segments of the market. Under the assumption of rationality, the premiums are small and they suggest a possible linear relationship between the premium and the expiry date of the contract. As a by-product of the analysis, an explanation is offered for the conflicting results which have been obtained in testing forward market efficiency, when such efficiency is tested with series in levels or with the deviations thereof in relation to the current spot rates.
Keywords: efficient markets; exchange rates; cointegration; risk premiums
JEL Codes: C22; F31; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk premium (G19) | peseta forward exchange rate market efficiency (F31) |
| risk premium (G19) | forward rate prediction errors (G17) |
| deviations from efficiency (D61) | risk premium (G19) |
| testing series in levels (C12) | conflicting results in efficiency tests (D61) |