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The Monetary Approach to Exchange Rate in an Efficient Foreign Exchange Market: Tests Based on Volatility
Author(s) -
HUANG ROGER D.
Publication year - 1981
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1981.tb03532.x
Subject(s) - exchange rate , economics , foreign exchange market , foreign exchange , volatility (finance) , sample (material) , econometrics , monetary economics , variance (accounting) , interest rate parity , accounting , chemistry , chromatography
The variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data. The paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data. The results are interpreted to suggest either the incompatibility of the monetary approach with sample data, or an inefficient foreign exchange market or both.