A note on tests of efficient market hypotheses: The case of the forward exchange rate

The purpose of this paper is to show that the definition of market efficiency based on rational expectations presents serious problems for empirical hypothesis testing on data that consist of equally spaced observations. Indeed, one can argue that the efficient market hypothesis is, in a strict sense, immune from empirical falsification for the typical data set. This idea is developed for an application of the efficient market hypothesis to the foreign exchange market, i.e., the notion that the forward exchange rate is an unbiased and efficient predictor of future spot exchange rates.