Testing for Purchasing Power Parity and Efficiency in the Taiwan Foreign Exchange Market - Financial and Economic Forecasting (Chapter 13)

20 Pages Posted: 9 Jan 2003

See all articles by Jack H.W. Penm

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

Jammie H. Penm

Independent

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management

Date Written: October 2002

Abstract

In this chapter, the hypotheses of purchasing power parity (PPP) and market efficiency are tested for the bilateral exchange rate between the New Taiwan (N.T.) and the US dollar. Different test results lead to the conclusion that, a PPP relationship over the long term cannot be rejected confidently. Furthermore, an error correction analysis indicates that this long-term relationship may be helpful in explaining short-term movements in the exchange rate. For testing the efficiency of Taiwan's foreign exchange market, the relationship between the spot rate and forward rates is examined for 10-, 30- and 90-day contracts was examined using daily observations. The forward premium is spilt into two components, one due to risk and the other due to a forecasting error. Over the two consecutive sample periods examined (1 May 1992 to 15 February 1993, and 16 February to 31 December 1993) the results are suggestive of a time-varying risk premium in the former period. However, efficiency was found to be acceptable for the 30- and 90-day contracts during the latter sample period.

Keywords: Purchasing Power Parity, Taiwan Foreign Exchange Market

JEL Classification: C22, C53, E31

Suggested Citation

Penm, Jack and Penm, Jammie H. and Terrell, R. Deane, Testing for Purchasing Power Parity and Efficiency in the Taiwan Foreign Exchange Market - Financial and Economic Forecasting (Chapter 13) (October 2002). Available at SSRN: https://ssrn.com/abstract=359942 or http://dx.doi.org/10.2139/ssrn.359942

Jack Penm (Contact Author)

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

Jammie H. Penm

Independent ( email )

61 (02) 62880126 (Phone)
61 (02) 61250087 (Fax)

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management ( email )

Sir Roland Wilson Building (120)
Canberra, Australian Capital Territory 0200
Australia

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