Cointegration and Exchange Market Efficiency: An Analysis of High Frequency Data


A cointegration analysis on a triangle of high frequency exchange rates is presented. Market effciency requires the triangle to be cointegrated and the cointegration term to be a martingale difference sequence. We find empirical evidence against market effciency for very short time horizons: The cointegration term does not behave like a martingale difference sequence. In an out-of-sample forecasting study the cointegrated vector autoregressive (VAR) model is found to be superior to the naive martingale. Finally, a simple trading strategy shows that the VAR also has a significant forecast value in economic terms even after accounting for transaction costs

In Adaptive Information Systems and Modelling in Economics and Management Science working paper series
Adrian Trapletti
Adrian Trapletti

Quant, software engineer, and consultant mostly investment industry. Long-term contributor and package author R Project for Statistical Computing.