The Random Behavior of Flexible Exchange Rates: Implications for Forecasting

Giddy, Ian H.; Dufey, Günter

doi:10.1057/palgrave.jibs.8490765

Cited by 113 publications

(32 citation statements)

References 11 publications

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“…See for instance, Kohlhagen, (1979), Giddy and Dufey, (1975), and Fama, (1976) among others. However, later studies have found evidence that is contrary to these early findings.…”

Section: Literature Reviewmentioning

confidence: 99%

Is Mexico's Forward Exchange Rate Market Efficient?

Islas-Camargo

Cortez²,

Flores

2018

REMEF

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This study proves the hypothesis of no bias in the forward exchange rate for the Mexican exchange market. A nonlinear Markov model with regime change was used instead of a linear regression model. The model identifies two states in the behavior of the forward exchange rate: one in which the null hypothesis of efficiency holds and the other one in which it does not. With the linear model the hypothesis is rejected for both forward rates, 30 and 90 days. However, when using the two-state model it is not possible to reject the null hypothesis for the 30-day forward rate in the state identified as efficient, but can be rejected in the other state. For the 90-day forward rate, the two states cannot be distinguished. Therefore, the nonlinear two-state Markov model is superior to the traditional linear regression model to test the hypothesis of no bias in the forward exchange rate, which is rejected in periods of high economic and political uncertainty. JEL Classification: C22; C50; C51; E58; F31; G14 Keywords: Forward exchange rate; Unbiased Forward Exchange Rate Hypothesis; Mexican Foreign Exchange Market; Markov Switching; Market Efficiency ¿El mercado mexicano de tipo de cambio a futuro es eficiente?Resumen El estudio prueba la hipótesis de no sesgo de la tasa forward de tipo de cambio para el mercado cambiario mexicano. Se utilizó un modelo no lineal de Markov con cambio de régimen en vez de un modelo de regresión lineal. El modelo identifica dos estados en el comportamiento del tipo de cambio forward : uno en el que la hipótesis nula de eficiencia se sostiene y otro en el que no. Con el modelo lineal la hipótesis se rechaza para ambas tasas forward, 30 y 90 días. Sin embargo, con el modelo de dos estados no es posible rechazar la hipótesis nula para la tasa forward de 30 días en el estado identificado como eficiente, pero se rechaza en el otro estado, En el caso de la tasa de 90 días no se distingue entre los dos estados. Por lo tanto, el modelo no lineal de Markov de dos estados es superior al modelo de regresión lineal para probar la hipotesis de no sesgo del tipo de cambio, la cual es rechazada en periodos de alta incertidumbre económica y política. IntroductionThe unbiased forward exchange rate hypothesis (UFRH) states that the forward discount is an unbiased predictor of the future spot exchange rate if we assume risk neutrality and a covariance stationary risk premium. Acceptance of the UFRH should also imply that the foreign exchange market is efficient. If the foreign exchange market is efficient, the spot (forward) exchange rate should incorporate all available information, and it should not be possible to forecast one spot (forward) exchange rate as a function of another. Depending on the time period, selection of exchange rates and type of methodology, researchers have reached different conclusions about the efficient market hypothesis. Rapp and Sharma, (1999), for instance, find mixed evidence of market efficiency among spot and forward rate for each of the G-7 countries. They argue that mark...

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“…See for instance, Kohlhagen, (1979), Giddy and Dufey, (1975), and Fama, (1976) among others. However, later studies have found evidence that is contrary to these early findings.…”

Section: Literature Reviewmentioning

confidence: 99%

Is Mexico's Forward Exchange Rate Market Efficient?

Islas-Camargo

Cortez²,

Flores

2018

REMEF

View full text Add to dashboard Cite

show abstract

“…Research by Giddy and Dufey (1975), Giddy (1976), Fieleke (1975), and Frenkel and Levich (1975) has presented evidence supporting the hypothesis of efficiency of the foreign exchange market. Only the weak form of the efficient market hypothesis has been tested, 1 i.e., that current foreign exchange rates fully reflect the information implied by the historical sequence of exchange rates.…”

Section: Efficiency Of Foreign Exchange Marketsmentioning

confidence: 79%

Efficient market implications for foreign exchange exposure management

Soenen

1979

De Economist

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“…One explanation for PPP"s stronger holding in the longer-term is the existence of substantial barriers, such as transportation costs, which can facilitate exchange rate deviation from PPP in the short-term, and once overcome correct towards PPP in the longer term (Abuaf and Jorion, 1990), although the view is not fully agreed (Giddy and Dufey, 1975;Adler and Lehman, 1983). Of interest to our study, however, is Frenkel"s review of "The Collapse of Purchasing Power Parity in the 1970s" where he cited previous research indicated little relationship between short-run inflation differentials between nations and the short-run changes in exchange rates.…”

Section: Literature Reviewmentioning

confidence: 99%

Brexit’s Protectionist Policy and Implications for the British Pound

Dixon¹,

Jo²

2017

IJFR

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In this paper, we examine the association among the macroeconomic variables -interest rate, inflation rate, unemployment, and the expected spot rate of the British pound with respect to the Euro around the announcement of "Brexit", June 2016, using the two international parity relationships, Purchase Power Parity (PPP) and International Fisher effect (IFE). We use the two international parity relationships to examine the significance of change in daily interest rates and monthly inflation rates on the change in actual daily spot rates. In addition, we postulate that the protectionist nature of Brexit policy has contributed to lowering U.K. unemployment and prompted wage growth, resulting in higher inflation rates. Our analysis, examining both the magnitude and directional deviation of the actual spot rate compared to the spot rate using the two parity relations, indicate that spot rates predicted based on the PPP and the IFE relations suggest the weakening of the British pound after the Brexit announcement. Furthermore, we find that U.K. unemployment has reduced due to the expanded monetary policy, consistent with the prediction of the Phillip"s curve.

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The Random Behavior of Flexible Exchange Rates: Implications for Forecasting

Cited by 113 publications

References 11 publications

Is Mexico's Forward Exchange Rate Market Efficient?

Is Mexico's Forward Exchange Rate Market Efficient?

Efficient market implications for foreign exchange exposure management

Brexit’s Protectionist Policy and Implications for the British Pound

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