Abstract
This paper tests the rational expectations hypothesis (REH) and the market efficiency hypothesis (MEH) in the foreign exchange markets, using survey data on expectations. Our results show that the spot exchange rates, expected exchange rates, and the forward rates all follow a random walk process. Hence, the cointegration theory is employed to test the REH and MEH. All the test statistics support the REH but fail to support the MEH. We use survey data on expectations to identify the causes behind this failure of the MEH. (JEL F31, G14).
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