Abstract
Keywords: foreign exchange market efficiency; forward rate unbiased hypothesis; covered interest rate parity; central banks; central banks’ policies
Highlights
The currency or foreign exchange market is commonly deemed to be the largest and most efficient financial market, where large, fast-paced transactions are performed worldwide and around the clock, with average daily trading volumes in the trillions of dollars (Bank of International Settlement 2016)
This study aims to test the efficiency of the Korean foreign exchange market and examine its determinants through several well-established methodologies based on the forward rate unbiasedness hypothesis and covered interest rate parity
The empirical findings indicate that the currency market and its related derivatives markets seem to be inefficient during the 2006–2016 period, but have improved considerably after the 2008 global financial crisis
Summary
The currency or foreign exchange market is commonly deemed to be the largest and most efficient financial market, where large, fast-paced transactions are performed worldwide and around the clock, with average daily trading volumes in the trillions of dollars (Bank of International Settlement 2016). The foreign exchange (FX) market is often considered to be the closest to a perfectly competitive market in which every participant is a price taker. The efficiency of the foreign exchange market since the 2008 global financial crisis (GFC) has come under increasing criticism. Close scrutiny by regulators revealed FX rigging scandals, mainly involving large globally-renowned banks, which led to dozens of traders being laid off, and banks involved in market manipulation being fined up to several hundred billion dollars (Finch 2017). Contrary to the common belief that the foreign exchange market is so efficient that no individual is able to affect the exchange rate, major cartel traders managed to rig the currency market
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