Foreign exchange market efficiency revisited

The cointegration of spot rates is neither a necessary nor a sufficient condition to account for the lack of foreign exchange market efficiency. Instead, Crowder [Crowder, W., 1994, 1996. J. Int. Money Finance 13, 551-564; 15, 661-664] and Engel [Engel, C., 1996. J. int. Money Finance 15, 557-560] claimed that the stationarity of the forward premium is crucial to the hypothesis of market efficiency. In this paper, we employ the panel unit-root test of Im et al. to examine the stationarity of forward premia and interest differentials among nine OECD countries. We reject the unit-root null for both the time series of the forward premium and interest differential, which in turn supports the hypothesis of foreign exchange market efficiency. (C) 1998 Elsevier Science Ltd. All rights reserved. JEL classification: F31.