We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
FOREIGN EXCHANGE MARKET EFFICIENCY UNDER FLEXIBLE EXCHANGE RATES.
- Authors
BURT, JOHN; KAEN, FRED R.; BOONI, G. GEOFFREY
- Abstract
This paper investigated the behavior of daily foreign currency price changes expressed in terms of the U.S. dollar for the British pound, the German mark and the Canadian dollar. Its purpose was to describe the price change distributions and to test whether these price changes conformed to an efficient market model. The price change distributions were leptokurtic. This type of distribution is consistent with an assertion that intrinsic or fundamental values may change rapidly in a very short period of time [8, p. 94] thus making it difficult for a private market participant to extricate himself from a deteriorating position. It is also consistent with the assertion that monetary authorities smooth out daily (short-run) fluctuations in their respective currencies in that the effect of these policies would be to cause a relatively large concentration of small price changes to be observed. From a methodological point of view, the leptokurtic price change distribution suggests that models and explanations of foreign exchange market behavior which rely on assumptions of normalcy may not be appropriate. The results of time series analysis show that the market efficiency hypothesis may be accepted for the British pound and the German mark. It is rejected for the Canadian dollar where it was found that daily price changes tended to underrespond to new information. This underresponse may be attributed to the efficacy of central bank intervention and the institutional character of the Canadian dollar exchange market. It is possible that the inefficiency observed may provide a potential for returns to speculation. Although transaction costs may eliminate any potential gains for most participants, large financial institutions and multinational firms may be able to benefit from the observed lack of independence in the management of their worldwide liquidity positions. However, a precise specification of the pattern and magnitude of price changes resulting from...
- Subjects
FOREIGN exchange rates; EFFICIENT market theory; U.S. dollar; POUND sterling; MARK (German currency); CANADIAN dollar
- Publication
Journal of Finance (Wiley-Blackwell), 1977, Vol 32, Issue 4, p1325
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1977.tb03330.x