Nonparametric testing of the high-frequency efficiency of the 1997 Asian foreign exchange markets

Abstract

Sherry’s nonparametric pattern tests for neural information processing are used to ascertain if the Asian foreign exchange (FX) rates followed random walks [Sherry, C.J., 1992. The Mathematics of Technical Analysis: Applying Statistics to Trading Stocks, Options and Futuresm Probus, Chicago]. The stationarity and serial independence of the price changes are tested on minute-by-minute data for nine Asian currencies from 1 January 1997 to 30 December 1997. The efficiency of these FX markets before and after the Asian currency ‘regime discontinuity’ are compared. The Thai baht (THB), Malaysian ringgit (MYR), Indonesian rupiah (IDR) and Singapore dollar (SGD) exhibited non-stationary behavior during the entire year, and gave evidence of a trading regime break, while the Phillipines’ peso (PHP), Taiwan dollar (TWD), Japanese yen (JYP) and German deutschmark (DEM) remained stationary, with the US dollar (USD) as numeraire. However, each half-year regime showed stationarity, indicating stable and nonchaotic trading regimes for all currencies, despite their high volatilities, except for the MYR, which exhibited non-stationarity in the second half of 1997. The Thai baht traded nonstationarily in the first half of 1997, but stationarily in the second half. while the TWD reversed that trading pattern. Based on Sherry’s four tests for serial independence, none of the currencies exhibited complete independence. Thus no Asian currency market—including the JYP—exhibited complete efficiency in 1997, in particular when compared with the highly efficient DEM. Remarkably, the PHP remained as efficient as the JYP throughout 1997.