THE EFFICIENCY OF FOREIGN EXCHANGE FUTURES MARKETS: EVIDENCE FROM COINTEGRATION TESTS
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This study investigates the efficiency of futures markets for foreign currencies using the technique of cointegrationforfiveactively-tradedcurrencies. Threetestsareused:(1)cointegrationtestsonthefuturesandspot prices ofthefive currencies; (2) cointegration tests ofthefutures and spot prices on each ofthefive currencies; and (3) estimation and test ofan error-correction modelfor each ofthefive currencyfutures. Resultsfrom tests one and two indicate that spot andfutures marketsfor thefive currencies are not cointegrated, thus, supporting the efficient markethypothesis. Forthelong-termtest,thereisaunitarycointegrationfactorforeachcurrencytested. However, results based on the error-correction model and F-tests on restricted parameters, produce inconsistent results, sug- gesting that the markets are not efficient.
Abstract
This study investigates the efficiency of futures markets for foreign currencies using the technique of cointegrationforfiveactively-tradedcurrencies. Threetestsareused:(1)cointegrationtestsonthefuturesandspot prices ofthefive currencies; (2) cointegration tests ofthefutures and spot prices on each ofthefive currencies; and (3) estimation and test ofan error-correction modelfor each ofthefive currencyfutures. Resultsfrom tests one and two indicate that spot andfutures marketsfor thefive currencies are not cointegrated, thus, supporting the efficient markethypothesis. Forthelong-termtest,thereisaunitarycointegrationfactorforeachcurrencytested. However, results based on the error-correction model and F-tests on restricted parameters, produce inconsistent results, sug- gesting that the markets are not efficient.