Tests of Efficiency in the Foreign Exchange Market

The objective of this paper is to test the efficiency in the foreign exchange market by using four exchange rates ($/€, $/£, C$/$, and ¥/$). Different theoretical models are applied, like the random walk hypothesis, the unbiased forward rate hypothesis, the composite efficiency hypothesis, the semi-strong market efficiency, and the exchange rate expectations based on anticipated and unanticipated events (“News”). If exchange rate efficiency does not hold, a risk premium must exist and can be measured. Also, the determination of this exchange risk premium is taking place by using a GARCH (p, q) model. The empirical results for these four major exchange rates (five currencies) show that relative efficiency exists, but there are significant risk premia for some exchange rates used, here.