COVARIANCE-MATRIX ESTIMATORS AND TESTS OF MARKET-EFFICIENCY

This paper carries out multi-currency, multi-horizon and combined test s of simple market efficiency using alternative covariance matrix esti mators whose finite sample performances have been examined elsewhere i n the literature. The data utilized are properly aligned weekly exchan ge rates from June 1973 to December 1994 on bid spot, 1-month, S-month and 6-month ask forward rates for several currencies. The results dem onstrate that tests of market efficiency are sensitive to the informat ion set specified, the prediction horizon considered and the covarianc e matrix estimator employed. In most but not all cases, rejections of market efficiency are overturned using a prewhitened heteroskedasticit y and autocorrelation consistent covariance matrix estimator with opti mal asymptotic properties and better finite sample performance. (C) 19 97 Elsevier Science Ltd.