An Empirical Examination of Rational Expectations Hypothesis in the Foreign Exchange Market

13 Pages Posted: 31 Oct 2018

See all articles by Fazlul Miah

Fazlul Miah

Fayetteville State University

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Aminur Rahman

Independent

Date Written: October 9, 2018

Abstract

The Efficient Market (EMH) and Rational Expectation Hypothesis (REH) have been examined for the Canadian Dollar / US Dollar and Swiss Frank / US Dollar exchange rates using data from February 1988 to May 1999 published by the Financial Times’ Currency Forecaster. Using unit root, and restricted co-integration techniques, we find that one-month ahead forecast is rational for the Swiss Frank / US Dollar exchange rate. However, one-month-ahead Canadian Dollar forecast is not rational. The study shows that when forecasting errors are corrected for serial correlation because of moving average process, three-month-ahead forecasts become rational for both the currencies. The twelve-month-ahead forecasts are not rational for any of the currencies.

Keywords: Efficient Market Hypothesis, Rational Expectation Hypothesis, Canadian Dollar, US Dollar, Swiss Franc, Currency, Forecast

Suggested Citation

Miah, Fazlul and Hassan, M. Kabir and Rahman, Aminur, An Empirical Examination of Rational Expectations Hypothesis in the Foreign Exchange Market (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3263106 or http://dx.doi.org/10.2139/ssrn.3263106

Fazlul Miah

Fayetteville State University

1200 Murchison Road
Fayetteville, NC 28301
United States

M. Kabir Hassan (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Aminur Rahman

Independent

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