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- Title
'WHITE-NOISE' IN IMPERFECT MARKETS: THE CASE OF THE FRANC/DOLLAR EXCHANGE RATE.
- Authors
LOGUE, DENNIS E.; SWEENEY, RICHARD JAMES
- Abstract
In efficient financial markets, asset prices adjust instantaneously to reflect new information. Instantaneous adjustment eliminates the possibility of predicting future prices using only past prices. Hence, the possibility of earning systematic excess profits is also eliminated. In assessing the efficiency of markets, spectral analysis and quite similar forms of serial correlation tests have been extensively employed, and apparently "indisputable" judgments have been made concerning the efficiency of markets based upon these results. Unfortunately, spectral analysis and its close variants are not particularly powerful tests of market efficiency. As Smidt (1968) pointed out in a much more general context, tests of efficiency should be directed against specific alternative hypotheses. That is, there is no all purpose test of market efficiency, and as this note will later demonstrate, spectral analysis is far from the best even when contrasted with a set of extremely naive trading rules. We first examine the theoretical deficiencies of spectral analysis; then we apply this test and a simple alternative to the foreign exchange market for the French Franc and U.S. dollar. The spectral test shows that this market is quite efficient, yielding 'white noise' at the 95% level of confidence, however, a simple filter rule shows that substantial profits could have been made by a trader in this market, even after accounting for transactions costs.
- Subjects
FOREIGN exchange rates; FRANC (French currency); MONEY market; U.S. dollar; EFFICIENT market theory; INTERNATIONAL finance; FOREIGN exchange rate risk; FOREIGN exchange futures; BALANCE of payments deficit; WHITE noise theory; FOREIGN exchange market; EDUCATION
- Publication
Journal of Finance (Wiley-Blackwell), 1977, Vol 32, Issue 3, p761
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1977.tb01986.x