Measuring Excess-Predictability of Asset Returns and Market Efficiency over Time

14 Pages Posted: 2 Jan 2019

See all articles by Richard M. Levich

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Thomas Conlon

University College Dublin

Valerio Potì

University College Dublin

Date Written: December 14, 2018

Abstract

We build on the predictability bounds of Huang et al. (2017) and Potì (2018) to develop an index of informational market inefficiency. This index takes values given by the levels of relative risk aversion (RRA) of the marginal investor such that, net of sampling error at a given confidence level, the observed predictability does not exceed the predictability bound. We demonstrate the usefulness of our index in a study of the predictability of forward exchange rates of currencies of emerging and developed economies from 1994 to 2016, to shed light on how the efficiency of currency markets has evolved over this time. We find widespread evidence of excess-predictability, hence currency market inefficiency, in the early part of the sample period and then at specific times, such as the recent global financial crisis. In the more recent part of the sample period, the evidence of excess-predictability is largely limited to emerging market currencies.

Suggested Citation

Levich, Richard M. and Conlon, Thomas and Potì, Valerio, Measuring Excess-Predictability of Asset Returns and Market Efficiency over Time (December 14, 2018). Available at SSRN: https://ssrn.com/abstract=3301324 or http://dx.doi.org/10.2139/ssrn.3301324

Richard M. Levich

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thomas Conlon

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

Valerio Potì (Contact Author)

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

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