International Journal of Economics and Finance; Vol. 7, No. 10; 2015 ISSN 1916-971X E-ISSN 1916-9728 Published by Canadian Center of Science and Education 235 Statistical Specifications and Diverse Tests of Efficiency in European Foreign Exchange Markets Augustine C. Arize 1 , Ioannis N. Kallianiotis 2 , Krishna M. Kasibhatla 3 , Scott Liu 4 & John Malindretos 5 1 Regents Professor of Business Administration and MIS Department, College of Business and Technology, Texas A&M, USA 2 Economics and Finance Department, The Arthur J. Kania School of Management, University of Scranton, USA 3 Department of Economics, School of Economics and Business, North Carolina A&T State University, USA 4 Associate Dean and Director of International Programs, New York Institute of Technology, USA 5 Department of Economics, Finance and Global Business, Cotsakos College of Business, William Paterson University, USA Correspondence: John Malindretos, Department of Economics, Finance and Global Business, Cotsakos College of Business, William Paterson University, USA. E-mail: MALINDRETOSJ@wpunj.edu Received: April 30, 2015 Accepted: August 4, 2015 Online Published: September 25, 2015 doi:10.5539/ijef.v7n10p235 URL: http://dx.doi.org/10.5539/ijef.v7n10p235 Abstract This paper uses an efficiency specification model of the spot and forward foreign exchange markets and tests the random walk, the general efficiency, and the unbiasedness hypotheses (the forward rate usually being viewed as an unbiased predictor of the future spot rate) by utilizing a regression estimation and many different specification and diagnostic tests for the series and the error terms (residuals). The random walk hypothesis cannot be rejected. The unbiased forward rate hypothesis has failed to be rejected in Germany, Belgium, and the Netherlands even though more research is needed in this area so as to have better statistical inferences available. 1 . Introduction Economists claim that the forward exchange rate will be an unbiased predictor of the future spot rate when markets are efficient and expectations rational (correct on average). And which market is, then, called efficient? According to Fama (1970), a market in which prices always “fully reflect” available information is called “efficient.” But economists have not reached agreement yet even on major economic issues. The allocation of ownership of the economy‟ s capital stock, and resources in general, is a very difficult task that economists have yet to resolve. So far, we have just depended on the markets and the price mechanism that our economic system perceives as ideal. All our models today assume that market efficiency exists. But is this true? An understanding of market efficiency and an improvement of its disefficiency are important to government policymakers, central bankers, multinational financial managers, and international investors. Market behavior is of greatest importance to government policymakers so they can design the appropriate macro-policy for achieving the goals of efficient resource allocation, steady growth, full employment, price stability, and improvement of the welfare of their fellow citizens. Samuelson and Nordhaus (1985) defined an efficient market as one where all new information is quickly understood by market participants and becomes immediately incorporated into market prices. This efficient markets hypothesis has been extensively developed in the domestic finance literature. Its importance is due to the fact that, if the market is efficient, the current price of an asset will fully reflect available information with regard to its valuation. The prices of financial assets thus provide signals for portfolio allocation. But is this “available information” the full information that human beings must have? In addition to domestic finance, the hypothesis of efficiency has been used in many studies of the foreign exchange market. This hypothesis suggests that there are no unexploited profit opportunities. In the foreign exchange market, this implies that the forward rate summarizes all relevant and available information useful for forecasting the future spot rate. Analyzing this aspect of efficiency requires an equilibrium model of pricing in the foreign exchange market. Consequently, any empirical test of efficiency is a joint test of efficiency (full