ABSTRACT Tests are conducted for the presence of unit roots in the autoregressive representations of the logarithms of spot and forward exchange rates. The results from these tests provide one explanation for some of the conflicting conclusions which emerge from recent empirical papers on the foreign exchange market.

[This paper describes a method for estimating and testing nonlinear rational expectations models directly from stochastic Euler equations. The estimation procedure makes sample counterparts to the population orthogonality conditions implied by the economic model close to zero. An attractive feature of this method is that the parameters of the dynamic objective functions of economic agents can be estimated without explicitly solving for the stochastic equilibrium.]