Working Paper: NBER ID: w2609
Authors: Robert F. Engle; Takatoshi Ito; Wenling Lin
Abstract: This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCII models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.
Keywords: market efficiency; volatility; foreign exchange; ARCH; GARCH
JEL Codes: C22; F31; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| news arrival (Y60) | volatility in multiple markets (G19) |
| volatility in one market (G17) | volatility in another market (G19) |
| past shocks in other markets (G19) | conditional volatility (C10) |
| volatility spillovers (C58) | market efficiency (G14) |