NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Valerio Poti

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December 2008Predictability and 'Good Deals' in Currency Markets
with Richard M. Levich: w14597
This paper studies predictability of currency returns over the period 1971-2006. To assess the economic significance of currency predictability, we construct an upper bound on the explanatory power of predictive regressions. The upper bound is motivated by "no good-deal" restrictions that rule out unduly attractive investment opportunities. We find evidence that predictability often exceeds this bound. Excess-predictability is highest in the 1970s and tends to decrease over time, but it is still present in the final part of the sample period. Moreover, periods of high and low predictability tend to alternate. These stylized facts pose a challenge to Fama's (1970) Efficient Market Hypothesis but are consistent with Lo's (2004) Adaptive Market Hypothesis, coupled with slow convergence toward...

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