Is the Tokyo Spot Foreign Exchange Market Consistent With the Efficient Market Hypothesis?

Abstract

Recent Studies in the area of foreign exchange market efficiency have employed time series analysis to test for the absence of long‐run equilibrium or cointegration relationships among the exchange rates for the major currencies. Cointegration directly violates the weak form of the Efficient Market Hypothesis in a speculative efficient market (Granger, 1986). In this study, we address the efficiency of the Tokyo spot foreign exchange market while updating the test procedures developed by Phillips and Ouliaris (1990), Johansen and Juselius (1990) and Johansen (1991). Cointegration is found to be absent, showing that the Tokyo spot market is consistent with the efficient market hypothesis.

European foreign exchange market efficiency: Evidence based on crisis and noncrisis periods

“…Like Sephton and Larsen, they argue that asset prices may be cointegrated due to model misspecification, and Lajaunie and Naka (1997) find cointegration to be sensitive to the sample period. Rush (1989, 1991), Lajaunie, Mcmanis, and Naka (1996), Lajaunie and Naka (1992), and Coleman (1990) do not find any cointegration and thus conclude that markets are weak form efficient, a conclusion contradicted by Wu and Chen (1998).…”

Bivariate cointegration of major exchange rates, cross-market efficiency and the introduction of the Euro

“…Baillie and Bollerslev (1989), however, find common stochastic trends in a sample of seven exchange rates, whereas, contrary to the two other authors, they apply the multivariate Johansen procedure. Coleman (1990), Copeland (1991), Tronzano (1992), Lajaunie and Naka (1992), Diebold, Gardeazábal, and Yilmaz (1994), Lajaunie, Naka, and McManis (1996), and Rapp and Sharma (1999) cannot detect cointegration of exchange rates for periods up to the end of the 1990s. On contrary, Alexander and Johnson (1992), Masih and Masih (1994) and Crowder (1994) can find long-run relationships among exchange rates on a US dollar basis and Karfakis and Parikh (1994) on the basis of the Australian dollar.…”

Market efficiency and cointegration of spot exchange rates during periods of economic turmoil: Another look at European and Asian currency crises

“…Among other econometric techniques, a cointegration analysis has been employed by several recent studies to examine foreign exchange market efficiency. The majority of prior empirical work (e.g., Coleman, 1990;Copeland, 1991;Lajaunie, McManis, & Naka, 1996;Lajaunie & Naka, 1992;MacDonald & Taylor, 1989;Rapp & Sharma, 1999) has found that spot exchange rates for various major currencies generally are not cointegrated during the modern float. The absence of cointegration and thus a cointegrating vector and the error correction model (ECM) (e.g., Engle & Granger, 1987) implies that the current value of one currency cannot be predicted by past values of other currencies.…”