Exchange of the Products in a Physical Form and Sale or Purchase of Literature review

Exchange of the Products in a Physical Form and Sale or Purchase of Foreign Currency - Literature review Example Two major factors are said to be the litmus test of market efficiency: the magnitude of statistical dependence between consecutive movements in exchange rates and the profitability of trading regulations. Research pertaining to the first issue on common statistical mechanisms like runs analysis and serial correlation analysis is to decide on the magnitude of reliance between successive exchange rate changes. (Jacque 1997:110). One hypothesis demonstrates that the past exchange rates include useful data in projecting future exchange rates since the data only spreads slowly among market participants, thus contradicting the market efficiency hypothesis. Poole in his empirical study has established substantial serial dependence in the currency price-rates of change by employing tests of serial correlation, filter rules and variance-time function. Pool attributed his research findings of serial reliance on transaction and inventory-carrying costs. Dooley and Shafer (1976) found a substant ial serial correlation in exchange rate series, thus doubting the Market Efficiency theory and a contrario, offering empirical proof for the Price Dynamics theory of exchange rate behaviour. Giddy and Dufey (1975) in their research study of the comparative projecting correctness of five models, proved that the behaviour of spot exchange rates is best illustrated as following a random walk, an outcome clearly dependable with the weak form of market efficiency. Some research studies have revealed that certain trading methodologies are able to make optimistic surplus revenues.