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The Economics of Exchange Rates (Collected Works of Harry Johnson) by Harry G. Johnson, Jacob A. Frenkel

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CHAPTER 8

TESTS OF FORECASTING MODELS AND MARKET EFFICIENCY IN THE INTERNATIONAL MONEY MARKET

RICHARD M. LEVICH

New York University

I. INTRODUCTION

Over the last twenty years, a substantial research effort has been directed toward developing and testing the efficient-market hypothesis. Stated simply, an efficient market is one “in which prices always ‘fully reflect’ available information” (Fama, 1970). Investors collect and process information in order to assess the value of an asset. Trading occurs so that market prices continuously reflect the information set; as a consequence, unusual profit opportunities are quickly eliminated.

The main laboratory for testing the efficient-market hypothesis has been the market for financial claims (primarily ...

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