Common stochastic trends, multivariate market efficiency and the temporal causal dynamics in a system of daily spot exchange rates
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It is demonstrated how the techniques of unit root testing and cointegration may be used to test for common stochastic trends, and their implications for addressing the market efficiency hypothesis (MEH) in a multivariate context within a seven-variable system of major daily (unpublished) spot exchange rates of the Malaysian ringgit. Finding the evidence of two cointegrating vectors, a vector error-correction model is developed to test for the direction of temporal causal dytiamics (iti the Gratiger sense) within this system before investigating the relative strength of the causality by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own. Results from the analysis tend to suggest a violation of the MEH in a speculative sense, due to the presence of two cointegrating vectors which also withstood the temporal instability test.
Stochastic , Multivariate market efficiency , Spot exchange rates
Mohammed Masih, Abul Mansur & Masih, Rumi. (1996). Common stochastic trends, multivariate market efficiency and the temporal causal dynamics in a system of daily spot exchange rates. Applied Financial Economics, 6, pp. 495-504.