Conditional Speculation in the Forex Market: Recent Empirical Evidence

Empirical Economics Letters, Vol. 3, pp. 207-223, 2004

Posted: 30 Mar 2005

See all articles by Sotiris K. Staikouras

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Abstract

If certain conditions in the econometric modelling of market efficiency do not hold; then it might be possible that speculative profits are available, hence the term conditional speculation in the title. The current research aims to examine such conditions between the spot and forward foreign exchange market. Using the framework of cointagration, the paper assumes that agents are risk neutral and use all available information rationally. A three-step procedure is employed and the evidence points out that the pricing function of the forward market is not efficient in its strict sense as postulated by the econometric assumptions. Mixed results are reported about the cointegrating regression, while the joint restrictions are rejected in the error correction representation.

Keywords: FOREX, Market efficiency, Speculation, Cointegration, Error correction modelling

JEL Classification: C3, C32, G1, G14

Suggested Citation

Staikouras, Sotiris, Conditional Speculation in the Forex Market: Recent Empirical Evidence. Empirical Economics Letters, Vol. 3, pp. 207-223, 2004. Available at SSRN: https://ssrn.com/abstract=679465

Sotiris Staikouras (Contact Author)

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

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