Strong form efficiency of the foreign exchange market and bank positions

This paper explores the strong form efficiency of the pound sterling‐U.S. dollar market by analyzing the ability of U.S. commercial banks to formulate superior expectations vis‐a‐vis the market in two ways. First, Stein's theory is employed to distinguish between shifts and disturbances in the exchange market equilibrium. Second, the swap transaction framework extracts U.S. commercial banks' expectations from their observed behavior. Results obtained from both approaches suggest that the observed group has better than random forecasting accuracy.