1 a) An econometrician tests foreign exchange market efficiency as follows. He/she simply runs a regression: St+1-St = a + b(fi-s;), where s, is the log of the spot exchange rate and f, is the log of the forward rate, and then tests whether a=0 and b=1. He then finds that the coefficient b is significantly negative. Critically discuss the extent to which this test strategy may not necessarily reveal the efficiency of the foreign exchange market and why he/she may find a significantly negative b coefficient. (50 marks)