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Since it has become apparent that the FMEH does not hold continuously, research has concentrated on finding the possible reasons.
It could also explain why the FMEH does not hold continuously in typical empirical tests but only as a long-run equilibrium relationship.
The central question that arises in this context is whether the strong empirical findings against rational expectations in the forward market are sufficient evidence against the FMEH. Should the FMEH be discarded and replaced with an alternative theory?
It is no surprise, then, that the survey studies [Goodhart, 1988; Froot and Frankel, 1989; Ito, 1990] tend to reject the hypothesis of rational expectations and, therefore, the FMEH for short-time increments but appear to be unable to reject it as a long-run equilibrium proposition [Liu and Maddala, 1992].
One has to conclude, then, the evidence collected so far from econometric studies on both ex post and ex ante survey data has conclusively rejected neither the hypothesis of rational expectations nor the FMEH because no test has been conducted that is adequate relative to the theory.
However, selectively choosing observations for which a rational expectations equilibrium has been reached is a tall order and, for all practical purposes, impossible for the type of data typically employed in studies of the FMEH. There is little knowledge of when a rational expectations equilibrium has been reached in the foreign exchange market.
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