A test of the news model of exchange rates

A Test of the News Model of Exchange Rates. — The news model is tested using quarterly data on six exchange rates involving four currencies over a period extending back to 1975. The results show that unbiased efficiency does not hold and that there are time-varying risk premia. The results also show that the news variables, proxied by the residuals of VAR models, do not have a significant effect on the exchange rate. It is argued that while news is a theoretically plausible explanation for erratic changes in the exchange rate, generated regressors cannot adequately represent news.