Abstract
This study examines the adaptive behavior of South African Rand (ZAR) exchange rate against its major trading partners, the US Dollar (USD) and the Chinese Yuan (CNY) over the period 1999-2020. The study uses a rolling parametric linear variance ratio (VR) test, nonparametric linear runs test, and non-linear Brock, Dechert and Scheinkman (BDS) test to determine time-varying predictability and regression analyses to assess the effect of market conditions. The results show that the foreign exchange market was found to be inefficient based on the VR tests, but efficient with very few windows of inefficiency based on the runs test and BDS test. In addition, apart from the GDP, none of the market conditions studied is associated with non-parametric linear and nonlinear predictabilities. The study draws two main conclusions. Firstly, the South African foreign exchange market is adaptively efficient. Secondly, foreign exchange market efficiency is primarily driven by the level of economic growth. Practically, it will be difficult for investors to exploit the few windows of predictability in the South African foreign exchange market by focusing mainly on the market conditions studied.
Highlights
This study examines the adaptive behavior of South African Rand (ZAR) exchange rate against its major trading partners, the US Dollar (USD) and the Chinese Yuan (CNY) over the period 1999–2020
Cial crises as one of the fundamental conditions influencing return predictability, the study A graphical plot of the windows’ variance ratio (VR), BDS and runs creates a dummy for financial crisis that takes the tests p-values shows how linear and nonlinear devalue of 1 when t is any month between December pendences behave over time
The following regression VR, runs, and BDS tests p-values for ZARUSD fomodel is specified to determine if the return pre- rex market over time, based on a 2-year window dictability is caused by market conditions: by 1-month step size
Summary
Ph.D., Postdoctoral Research Fellow, School of Accounting, Economic and Finance, Finance Department, University of KwaZulu-Natal, South Africa. While the EMH suggests that the financial market is efficient and prices are unpredictable, the technical analysts believe that the prices are predictable and the market is inefficient. The conflicting findings are not totally surprising as the ideology of seeing financial market as either efficient or inefficient over a prolonged period of examination period inevitably produces conflicting findings among scholars
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