Skip to main content
SpringerLink
Log in

An Alternative Test of the Rational Expectations-Perfect Substitutability Hypothesis: Deutsche Mark and Pound Sterling

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

This note tests the joint hypothesis of rational expectations and perfect substitutability between assets denominated in US dollars, deutsche marks and pound sterling. The hypothesis implies that the forecast errors from the uncovered interest rate parity condition follow a white noise process. Using a test based on the frequency domain properties of white noise processes, the hypothesis is not rejected on a sample of monthly observations from January 1974 to December 1981.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Cumby, R.E., andM. Obstfeld: A Note on Exchange Rate Expectations and Nominal Interest Differentials: A Test of the Fisher Hypothesis. Journal of Finance (June), 1981.

  • Dornbusch, R.: Exchange Risk and the Macroeconomics of Exchange Rate Determination. Unpublished manuscript, M.I.T., 1980.

  • -: Equilibrium and Disequilibrium Exchange Rates. NBER Working Paper No. 983 (September), 1982.

  • Durbin, J.: Tests of Serial Independence Based on Cumulated Periodogram. Bullettin of the International Statistical Institute42, 1967, 1039–1049.

    Google Scholar 

  • —: Tests of Serial Correlation in Regression Analysis Based on the Periodogram of Least-Squares Residuals. Biometrika56, 1969, 1–15.

    Google Scholar 

  • Frankel, J.A.: In Search of the Exchange Risk Premium: A Six-Currency Test Assuming Mean-Variance Optimization. University of California at Berkeley, 1982. Forthcoming in Journal of International Money and Finance.

  • Frenkel, J.: Flexible Exchange Rates in the 1970s. Journal of Political Economy (August) 1981.

  • Hsieh, D.A.: Tests of Rational Expectations and No Risk Premium in Forward Exchange Markets. NBER Working Paper, No. 843 (January), 1982.

  • Samuelson, P.A.: Proof that Properly Anticipated Prices Fluctuate Randomly. Industrial Management Review (Spring), 1965.

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Massachusetts Institute of Technology, E52-300, 02139, Cambridge, MA, USA

    A. Giovannini

Authors
  1. A. Giovannini
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

I thank Rudiger Dornbusch for many helpful suggestions. All remaining errors are mine.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Giovannini, A. An Alternative Test of the Rational Expectations-Perfect Substitutability Hypothesis: Deutsche Mark and Pound Sterling. Empirical Economics 8, 59–62 (1983). https://doi.org/10.1007/BF01978097

Download citation

  • Received:

  • Revised:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF01978097

Keywords

Search

Navigation