THE EFFICIENCY OF FOREIGN EXCHANGE FUTURES MARKETS: EVIDENCE FROM COINTEGRATION TESTS

This study investigates the efficiency of futures markets for foreign currencies using the technique of cointegration for five actively-traded currencies. Three tests are used: (1) cointegration tests on the futures and spot prices of the five currencies; (2) cointegration tests of the futures and spot prices on each of the five currencies; and (3) estimation and test of an error-correction model for each of the five currency futures. Results from tests one and two indicate that spot and futures markets for the five currencies are not cointegrated, thus, supporting the efficient market hypothesis. For the long-term test, there is a unitary cointegration factor for each currency tested. However, results based on the error-correction model and F-tests on restricted parameters, produce inconsistent results, suggesting that the markets are not efficient.