Book Description

This dissertation analyses the following three interrelated issues within an efficient market context. 1. Comparative forecasting accuracy of forward exchange-rates vis-a-vis the spot rate predictions marketed by a number of foreign-exchange forecasting services. 2. The existence of "premiums" imbedded in forward exchange-rates. 2. The existence of "premiums" imbedded in forward exchange-rates. 3. Excess profit opportunities in speculative trading strategies on currency futures contracts based on the "trading-signals" marketed by another group of foreign-exchange forecasting services. Track records of twelve future spot exchange-rate forecasting services and four technical exchange rate trend analyzing services are used to compare their predictive performances with that of forward exchange rates and with currency futures contracts. Seven major currencies vis-a-vis the U.S. Dollar are examined during a period of seven years, from 1974 through 1980. The study reveals the following. 1. Foreign-exchange forecasting services in general do not provide more accurate point estimates of the future spot rates than those provided by the forward rates. 2. Both forward rates and forecasts marketed by those services are found to be biased predictors of the future spot rates implying the existence of "premiums" both in forward rates and in those predictions. The premiums are found to be consistently and significantly positive during the study period. This important finding kelps to eliminate ouch of the ambiguity pertaining to the issue of "forward rate bias" in foreign-exchange literature. 3. The statistical analyses used in the study do not provide support for rejecting the notion of inefficiency in the market for foreign-exchange. Although the findings regarding the market efficiency may be due to the inappropriateness of the market model which was jointly tested with the null hypothesis of "efficiency", they may remain valid until either better statistical techniques or more appropriate equilibrium models are developed.