RDP 8603: Risk Premia, Market Efficiency and the Exchange Rate: Some Evidence Since the Float 5. Conclusion

The aim of this paper has been to shed some light on the behaviour of the foreign exchange market since the floating of the Australian dollar. The focus of the study has been on the speculative efficiency hypothesis. It has been found that, for the post-float period as a whole, this hypothesis could not be rejected In the 15-day and 90-day markets. However, the Joint hypothesis can be rejected in the 30-day market. In particular, the forecast errors In the 30 day market were found to be serially correlated. Hence, readily available information can be used to improve the forecast of the future spot exchange rate that Is provided by the current forward rate.

A major finding of the paper has been the identification of a behavioural change in the forward market after February 1985. The results, in general, suggest that the markets (particularly the 15-day and 30-day markets) were speculatively efficient before the major depreciation in February 1985 but have not been speculatively efficient since this time. The exception to this was the 90-day market. In this market there was evidence of speculative inefficiency before and after the depreciation. The finding suggests that subsequent to the depreciation started in February 1985 the market became less efficient in its use of available information and/or a risk premium developed.