Efficiency of Foreign Exchange Markets: The Case of Nigeria

Abstract

Notwithstanding a particular economy, exchange rate plays a pivotal role in the determination of major macroeconomic policies. Hence, the efficiency of the foreign exchange market in a developing country like Nigeria is essential with respect to broader macroeconomic facets including the monetary dimension. Accordingly, the current study examines the weak and semi-strong form efficiency of the Nigerian foreign exchange market. Employing time series analysis and examining unit root test, Johansen cointegration test, Wald coefficient test, impulse response function and variance decomposition analysis, it was found that the Nigerian foreign exchange market is weak form efficient but is inefficient in the semi-strong dimension. This reflects that participants would not be able to devise measures to extract excess returns from the market based on historical information, but can engage in profitable transactions once accommodating publicly available information together with historic statistics. Specifically, the possibility of predicting exchange rates of the Naira with other currencies emanating from the Naira-USD exchange rate is very high. Reforms and government intervention should look into making the market more transparent and accountable, which would not only abandon excess returns from the market but will also support export-oriented industries in the economy, foreign exchange reserves and a range of other significant macro-economic facets.