Ans: No, we expect the rate to be mean reverting. (From Javed's email: If an exchange rate follows a martingale, and someone holds that currency in equilibrium, does that imply zero market price of risk (mean zero return with risk is being held) or that the risk is purely idiosyncratic (which would be hard to believe for a currency)? )
I think a good mathematical definition of what we mean by market efficiency would be useful here. The exchange rate is only a martingale under the forward measure, the forward measure is only equal to the physical measure if interest rates are constant and agents are all risk neutral.
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Ans: No, we expect the rate to be mean reverting. (From Javed's email: If an exchange rate follows a martingale, and someone holds that currency in equilibrium, does that imply zero market price of risk (mean zero return with risk is being held) or that the risk is purely idiosyncratic (which would be hard to believe for a currency)? )
I think a good mathematical definition of what we mean by market efficiency would be useful here. The exchange rate is only a martingale under the forward measure, the forward measure is only equal to the physical measure if interest rates are constant and agents are all risk neutral.
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