NBER Working Paper No. Since the move to generalized floating in, exchange rates between major currencies have displayed large fluctuations. This turbulence of foreign exchange rates is an important concern of government policy and its explanation is a challenge for theories of foreign exchange market behavior.

In Section I of this paper, we document the extent of turbulence in foreign exchange markets by examining i the magnitude of short-run variations in exchange rates relative to other measures of economic variability; ii the degree of divergence between actual and expected changes in exchange rates; and iii the extent to which exchange-rate movements have diverged from movements of relative national price levels. In Section II, we provide a general explanation of this turbulence in terms of the modern "asset market theory" to exchange-rate determination.

This theory emphasizes that exchange rates, like the prices of other assets determined in organized markets, are strongly influenced by the market's expectation of future events.

In this context, we also discuss the narrower technical question of "foreign exchange market efficiency.

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Efficiency of Foreign Exchange Markets and Measures of Turbulence Jacob A. Frenkel , Michael L. Mussa NBER Working Paper No. Hansen and Hodrick Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models Mussa The Theory of Exchange Rate Determination Frenkel w The Collapse of Purchasing Power Parities during the s Wei and Kim w The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise?

Levich w Empirical Studies of Exchange Rates: National Bureau of Economic Research, Massachusetts Ave.

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