Test of Weak Form Efficiency and Nigerian Foreign Exchange Market Volatility

Chukwu Agwu Ejem ,Udochukwu Godfrey Ogbonna

doi:10.7176/rjfa/11-16-14

Abstract

Beside the stated concerns for this study, a lot of scholarly articles abound on the test of weak form efficiency and capital market. For that, the researchers deemed it fit to test if the Nigerian foreign exchange market follows a random walk or not. This and others led to this study, test of weak form efficiency and volatility of the Nigerian foreign exchange market with the following parametric tools; Augumented Dickey Fuller (ADF) unit root test, Pairwise Granger Causality test, Regression test, Normality/Random Walk test, ARCH-GARCH Model, the Autocorrelation cum partial autocorrelation method and Variance Ratio Test. After the analysis, all the results confirmed that the Nigerian foreign exchange market does not follow a random walk, hence weak form inefficient. No wonder the exchange rate business in Nigeria is very lucrative. The dealers always make abnormal profit at every slightest opportunity. Again, the result of the EGARCH framework found that volatility exacts negative impact on Nigerian foreign exchange market and that exchange rate volatility in Nigerian foreign exchange market is persistent. Again, that there is no asymmetric effect in the Nigerian foreign exchange market. Consequent upon the findings, the researchers suggest that the regulatory authorities of the Nigerian foreign exchange market tighten up their belt to enhancing the efficiency of the market. Again, the authority must do everything to stabilize the naira to ensure efficiency in the foreign market in Nigeria. Keywords: Weak form, Foreign Exchange Market, Parametric tool, Nigeria DOI: 10.7176/RJFA/11-16-14 Publication date: August 31 st 2020

Highlights

The foreign exchange market is seen as the market in which individuals, firms and banks purchase and sell foreign currencies or foreign exchange
Though the USA has gradually lost its position as sole vehicle currency that it had at the end of War II (WW II), it remains by far the dominant vehicle currency in Nigeria and in the world today
Concluding Remarks and Recommendations This study, test of weak form efficiency and volatility of the Nigerian foreign exchange market using parametric tools stated in study revealed that, the Nigerian foreign exchange market is not weak form efficient, corroborating Ibrahim, Long, Ghani and Salleh (2011) and Harish and Sathyanarayana (2016)

Summary

Introduction

The foreign exchange market is seen as the market in which individuals, firms and banks purchase and sell foreign currencies or foreign exchange. It is the mechanism, institutional arrangement through which foreign currencies, futures and options are traded. The market offers facilities for determination of realistic exchange rate among currencies of different nations in a bid to assist the flow mechanism of such currencies among participants of concerned nations, alongside settlement of international account. This is usually aided by electronic fund transfer media. The innovations like direct dialing telephone or electronic mail services anywhere in the world, the telex has become relatively less important (Salvatore, 2004; Ezirim, 2005)

Methods

Results

Conclusion