The existence of a numeraire currency in foreign exchange: Evidence from transaction spot rates for Japan, Germany, and the United States

• Published in: Global finance journal Vol. 8; no. 2; pp. 181 - 197
• Main Authors: Herbst, Anthony F., Smith, Charles L., Traichal, Patrick A.
• Format: Journal Article
• Language: English
• Published: Greenwich Elsevier Inc 01-10-1997; Elsevier; Elsevier Science Ltd
• Series: Global Finance Journal
• Subjects: American dollar; Arbitrage; Canadian dollar; Currency; Currency transactions; Economic models; Foreign exchange markets; Foreign exchange rates; Inflation rates; International finance; Purchasing power parity; Regression analysis; Studies; Time series; Yen
• ISSN: 1044-0283; 1873-5665
• DOI: 10.1016/S1044-0283(97)90014-4

A study examines the time-series properties of transaction level currency exchange data to infer the use of a base currency for market transactions. Consistent with the microstructure literature, the study groups individual transactions into 5-minute trading windows by calculating the time-weighted average exchange rates. Recognizing previous findings of cointegration, the study examines multiple foreign exchange time series in a seemingly unrelated regressions model. The study finds that lagged levels and differences are significant predictors for several periods. Lagged cross innovations have statistically significant impact for almost all of the series examined. However, the average economic impact of these innovations is well within the average bid-ask spread. These results are interpreted as evidence that no single currency functions as numeraire and, given the data and significance level chosen, the foreign exchange time series appear to be weak-form efficient.