Exercise 3 :   Orthogonality Tests

st+1 - ft = b0 + å2j=0 bj+1(st-j - ft-1-j) + ut+1

Currency R2 F F
H0: b0=0,b1=0,
      b2=0,b3=0 		Q(12)
FF 0.0165 0.9873 2.9670   5.7309
SF 0.0145 0.8707 3.3196 12.7850

*(**) Meaningful at the 1% (5%) level.
Monthly data for the period January 1979 to January 1994.
Currencies: French Franc and Swiss Franc

The table presents the results of the third test of speculative efficiency for the 30 days forward exchange market. This test is based on the estimation of an equation linking the prediction error st+1, to past prediction errors. The estimation method is ordinary least squares. The questions refers to both currencies (answers are the same for each currency)

  1. This test is a weak-form test
    yes          no
  2. The Wald test cannot reject the hypothesis that the coefficients are all zero
    yes          no
  3. The forward exchange rate incorporates all available information to forecast the future spot exchange rate
    yes          no
  4. The orthogonality hypothesis is rejected
    yes          no
  5. The forward market is not efficient
    yes          no

 
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