Abstract

Exchange Rate Movements. Some results of an analysis of the short-run

This essay examines the question of whether the theory of efficient markets, which is generally applied in analysing price formation on financial markets, can also be used to explain short-term price movements on the foreign exchange markets. In the theory of financial markets, a market is termed efficient when the negotiated prices or exchange rates reflect completely in every month all available information on past prices and anticipated future prices and their determinants. For empirical studies of efficiency hypotheses, this generally implies restrictions with respect to the significance of past information. In the present essay we speak of weak efficiency when past exchange rate changes can contribute nothing towards explaining current and forecasting future exchange rate changes. Furthermore, we speak of mediumstrong efficiency when not only the history of the original series itself, but all information relevant to exchange rates has already been taken into account in the exchange rate concerned. The first part of the empirical section covers investigation of weak efficiency. With the help of autocorrelation analyses and non-parametric, so-called run or iteration methods, the hypothesis was tested with regard to whether it is possible to draw from knowledge of the past exchange rate trend conclusions as to the future development. Although in individual tests certain counterevidence was found, no systematic relationship could be found between current and past exchange rate changes and hence the hypothesis of weak efficiency could not be rejected. In the second part of the empirical section, more far-reaching information was examined with respect to its “efficient evaluation”. The information involved is that relating to macrovariables, which are conventionally considered to determine exchange rates. Although here again individual tests produced certain counter-evidence, this form of efficiency, too, could not be rejected on a systematic basis. These results are regarded as evidence for the hypothesis that the great majority of short-term changes in exchange rates is attributable to unexpected changes in the determining macro-variables.