1984•Applied EconomicsRequires access

Rational expectations and forward exchange market efficiency

Paul Sanderson

Abstract

This paper is concerned with testing the hypothesis that expectations in the foreign exchange market are rational, as has been assumed in recent asset market approaches to exchange rate determination. The relationship between the rational expectations hypothesis and the notion of forward market efficiency is discussed and the latter is used as a means of testing for rationality. Evidence is presented which is largely consistent with the market efficiency–rational expectations hypotheis.

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Key concepts: Rational expectations, Economics, Rationality, Efficient-market hypothesis, Foreign exchange market, Market efficiency, Financial economics, Asset (computer security)