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166CHAPTER 6. FOREIGN EXCHANGE MARKET EFFICIENCYTable 6.2: Monte Carlo Distribution of OLS Slope Coefficients andT-ratios using Overlapping and Nonoverlapping Observations.Overlapping percentiles RelativeT Observations 2.5 50 97.5 Range50 yes slope 0.778 0.999 1.207 0.471t NW (-2.738) (-0.010) (2.716) 1.207t HH [-2.998] [-0.010] [3.248] 1.38316 no slope 0.543 0.998 1.453t OLS ((-2.228)) ((-0.008)) ((2.290))100 yes slope 0.866 0.998 1.126 0.474t NW (-2.286) (-0.025) (2.251) 1.098t HH [-2.486] [-0.020] [2.403] 1.18333 no slope 0.726 0.996 1.274t OLS ((-2.105)) ((-0.024)) ((2.026))300 yes slope 0.929 1.001 1.074 0.509t NW (-2.071) (0.021) (2.177) 1.041t HH [-2.075] [-0.016] [2.065] 1.014100 no slope 0.858 1.003 1.143t OLS ((-2.030)) ((0.032)) ((2.052))Notes: True slope = 1. t NW : Newey—West t-ratio. t HH : Hansen—Hodrick t-ratio.t OLS : OLS t-ratio. Relative range is ratio of the distance between the 97.5 and2.5 percentiles in the Monte Carlo distribution for the statistic constructed usingoverlapping observations to that constructed using nonoverlapping observations.(108)⇒The advantage that one gains by going to monthly data are illustratedin table 6.2 which shows the results of a small Monte Carlo experimentthat compares the two (overlapping versus nonoverlapping)strategies. The data generating process isy t+3 = x t + ² t+3 ,x t =0.8x t−1 + u t ,² tiid∼ N(0, 1),u tiid∼ N(0, 1),where T is the number of overlapping (monthly) observations. y t+3 isregressed on x t and Newey-West t-ratios t NW are reported in parentheses.5 lags were used for T =50, 100 and 6 lags used for T = 300.