Conditional Speculation in the Forex Market : Recent Empirical Evidence

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