The Exchange Market Efficiency: An Empirical Analysis On Two Exchange Rates

Since the breakdown of the Bretton Woods system of fixed exchange rates in 1973, exchange rates between major currencies have been fluctuating violently, which has made the traditional theories of exchange rate unable to explain the fluctuation of foreign exchange rates. Nowadays, scholars begin to regard foreign currencies as a kind of special financial asset and apply the study method for asset markets to the foreign exchange markets. If the foreign exchange markets are regarded as asset markets, a technical matter of "market efficiency" must be solved. The securities market theory based on the Efficient Market Hypothesis could be applied to analyse the exchange rates only when the foreign exchange market is proved to be efficient. And the method based on the Efficient Market Hypothesis is essential to the forecasting of the exchange rates and the financial investment. Moreover, the efficiency of the foreign exchange markets will affect the selection of foreign exchange system of a country and the formulation of related policies. Therefore, the research on the efficiency of the foreign exchange markets is not only a theoretical issue, but also a significant and realistic issue which will influence the formulation of economic and financial policies of a government.On the basis of summarizing the domestic and international theoretical models and empirical test methods about the efficiency of the foreign exchange markets, this essay has innovatively adopted macro-econometric methods to examine the efficiency of the foreign exchange markets. Firstly, the study based on the random walk shows that the test on the random walk model is consistent with the test on the efficiency of the foreign exchange markets when the covered interest-rate parity exists and the nominal interest differentials remain constant. And the test result shows that the American and the Japanese foreign exchange markets are both efficient. Secondly, the subsample study based on the linear regression model shows that although taking the instability of economic structure into account, the estimation of exchange premium to the change of spot exchange rate is obviously negative, which meas the outlier or breakpoint is not the reason that empirical research refuses the efficiency of the American and the Japanese foreign exchange markets. The real reason is that the theory has some disadvantages. Finally, the result of cointegration test on the spot and the forward exchange rate of the same currency shows that the efficiency of the...