Efficiency in the forward exchange market - an application of co-integration - a comment

Abstract

In a recent edition of the Review, Lucey (1988) finds evidence of forward exchange market inefficiency using the co-integration technique. His results relate to sterling and the dollar and are based on daily spot and one month forward exchange rates. One hundred observations were used starting in December 1987. In the Lucey paper, the data overlap (the sampling period is smaller than the forecast period) and this can result in residual auto??__correlation. Hansen and Hodrick (1980) andHsieh (1982) have shown that this problem can be overcome if a Generalised Least Squares estimation procedure is used. It is desirable to use overlapping data where possible to overcome the data shortage problem.