A model of speculative efficiency with 'news' error components.

This paper proposes a theoretical model to assess the effect of 'news' on the spot-forward-exchange-rate relationship and thereby predicts the direction of the impact of 'news' on the exchange rate. Two types of 'news' are analysed: rational expectations type innovations and announcement effects from newspapers. By using historical data from a time period which includes the German hyperinflation of the early 1920s, an estimable form of the model is derived which is substantially simpler than the version required using contemporary data. Preliminary empirical results support the main theoretical predictions but also cast some doubt on a literal interpretation of the exchange rate model plus rational expectations. [ABSTRACT FROM AUTHOR]