Exercise 5 :   The Error Correction Model

st+1 - st = a + c (st - ft-1) + d (ft - ft-1) + ut+1

Constant st-ft-1 ft-ft-1 R2 D.W. F F
H0: a=0,c= -1,d=1		 Q(12)
-0.0019 -0.0429 0.0223 0.00 1.99 0.38 2.90 8.03
(-0.82) (0.05) (0.03)          

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

The table presents the results of a speculative efficience test based in the estimation of an error correction model for the 30 days forward exchange market. This test is based on the estimation of the ECM which links the future depreciation rate st, to the forecasting errors of the preceding period and the variation of the forward exchange rate.

  1. The test is applied when there is cointegration
    yes          no
  2. If we want to represent the short-term dynamic we have to include lagged values of the depreciation rate and the variation of the forward exchange rate
    yes          no
  3. The DW statistics indicates that there is no autocorrelation of order one
    yes          no
  4. The joint hypothesis about the coefficients is not rejected
    yes          no
  5. May we accept the efficiency of the forward exchange market?
    yes          no

 
This document was last modified on - Saturday, 24-Oct-98 by S. Angela Merino
Hosted by Tecfa, Geneva University