DP1016 Efficiency and Expectations Revisited: A Foreign Exchange Market with Bayesian Players

Author(s): Nikos Christodoulakis, Sarantis C Kalyvitis, Nick Karamouzis
Publication Date: September 1994
Keyword(s): Bayesian Learning, Devaluation, Efficiency, Expectations, Unbiasedness
JEL(s): F31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1016

The paper re-examines the efficiency hypothesis in the foreign exchange market. The traditional efficiency testing equations are reviewed and a model is developed that incorporates Bayesian revisions in the form of devaluation expectations. A number of propositions regarding the pattern of the coefficients in efficiency testing equations are established. The results are confirmed by the empirical estimation of the model for the Greek foreign exchange market.