ABSTRACT
A financial market can be said to make efficient use of information if prices adjust fully and instantaneously when new information becomes available (Fama 1976). This demanding requirement for an efficient market is often relaxed to a statement that trading systems cannot use information to outperform passive investment strategies when transaction costs and risk are considered (Jensen 1978). It is claimed in this chapter that currency futures markets are not efficient according to Fama’s definition and that there is strong evidence that they also fail to be efficient with respect to Jensen’s definition. Detailed results are given for yen–dollar futures traded at the International Monetary Market (IMM) of the Chicago Mercantile Exchange from 1979 to 1987, complementing studies of European currency futures traded at the same market (Taylor 1986; Taylor and Tari 1989). It is shown that yen trading would have been profitable, and more so than trading other currencies.
