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Foreign Exchange Rates as Unbiased Estimate of Future Sport Rates - Dissertation Example
Finance & Accounting
Pages 26 (6526 words)
Foreign Exchange Rates as Unbiased Estimate of Future Sport Rates Abstract The aim of this research study is to discover whether or not the efficient market hypothesis (EMH) holds true in the currencies market, specifically in the Swiss franc to U.S. dollar currencies exchange…
This knowledge will enable the formulation of trading strategies to enhance the effectiveness of market entry and exit, to properly time the purchase of currencies at the lows, and the sale at the highs, or to adopt an adequate hedging position. The study employed three methods of determining the existence of EMH with the intention of arriving at results that corroborate each other, since any one method taken alone can never be assuredly accurate. The first method employs the regression of future spot rates against forward exchange premiums. The second method tests for a confirmation of the unbiased forward rate hypothesis which is indicated by the co-integration of the forward exchange rate and the future spot rate. The third method employs an analysis of EMH on real terms also through regression modeling and equation estimation. Each of the three methods provided evidence that the efficient market hypothesis is valid in the currencies exchange market, specifically in the Swiss franc – US dollar spot and forward exchange rates. The weak form of market efficiency has been tested and validated, for which reason investors and business would most likely not realize abnormal profits through the use of methods of technical analysis for price forecasting. ...