Foreign Exchange Market Efficiency Research Articles

Is The Foreign Exchange Market Efficiency Adaptive? The Empirical Evidence From India

ABSTRACTIs market efficiency a time-varying condition or static? Do economic and noneconomic events explain evolving efficiency? This study tries to respond to these two important questions of efficiency in foreign exchange markets. For empirical scrutiny, as per the framework of the adaptive market hypothesis, the authors employ recent methods that are robust and that possess stronger power properties. We find that efficiency is time dependent and that major economic and noneconomic events cause a change in efficiency. The novelty of this study lies in its attempt to measure the relative degrees of efficiency for major currency pairs and to find the factors of the efficiency level.

Nonlinear Multiscale Entropy and Recurrence Quantification Analysis of Foreign Exchange Markets Efficiency.

The regularity of price fluctuations in exchange rates plays a crucial role in foreign exchange (FX) market dynamics. In this paper, we quantify the multiply irregular fluctuation behaviors of exchange rates in the last 10 years (November 2006–November 2016) of eight world economies with two nonlinear approaches. One is a recently proposed multiscale weighted permutation entropy (MWPE) and another is the typical quantification recurrence analysis (RQA) technique. Furthermore, we utilize the RQA technique to study the different intrinsic mode functions (IMFs) that represents different frequencies and scales of the raw time series via the empirical mode decomposition algorithm. Complexity characteristics of abundance and distinction are obtained in the foreign exchange markets. The empirical results show that JPY/USD (followed by EUR/USD) implies a a higher complexity and indicates relatively higher efficiency of the Japanese FX market, while some economies like South Korea, Hong Kong and China show lower and weaker efficiency of their FX markets. Meanwhile, it is suggested that the financial crisis enhances the market efficiency in the FX markets.

Efficiency of Foreign Exchange Markets in Sub-Saharan Africa in the Presence of Structural Break: A Linear and Non-Linear Testing Approach

This study examines the efficiency of foreign exchange (forex) market of 10 selected countries in sub-Saharan Africa in the presence of structural break. It uses data on the average official exchange rate of currencies of the selected countries to the US dollar from November 1995 to October 2015. This study employs Perron unit root test with structural break to endogenously determine the break period in the forex markets. It also employs the Kim wild bootstrap variance ratio test and BDS independence test to detect linear and nonlinear dependence in forex market returns respectively. In the full sample period, the Kim wild bootstrap joint variance ratio test shows that only two forex markets are efficient while the BDS independence test reports that all the forex markets are not efficient. The subsample period analysis indicates that the efficiency of the majority of the forex markets is sensitive to structural break, thus providing evidence in support of the adaptive market hypothesis. This study suggests that ignoring structural break and nonlinearity of returns may lead to misleading results when testing for market efficiency.

Efficiency of Foreign Exchange Markets in Sub-Saharan Africa in the Presence of Structural Break: A Linear and Non-Linear Testing Approach

This study examines the efficiency of foreign exchange (forex) market of 10 selected countries in sub-Saharan Africa in the presence of structural break. It uses data on the average official exchange rate of currencies of the selected countries to the US dollar from November 1995 to October 2015. This study employs Perron unit root test with structural break to endogenously determine the break period in the forex markets. It also employs the Kim wild bootstrap variance ratio test and BDS independence test to detect linear and nonlinear dependence in forex market returns respectively. In the full sample period, the Kim wild bootstrap joint variance ratio test shows that only two forex markets are efficient while the BDS independence test reports that all the forex markets are not efficient. The subsample period analysis indicates that the efficiency of the majority of the forex markets is sensitive to structural break, thus providing evidence in support of the adaptive market hypothesis. This study suggests that ignoring structural break and nonlinearity of returns may lead to misleading results when testing for market efficiency.

Dynamics of Indian Foreign Exchange Market Efficiency : An Adaptive Market Hypothesis Approach

Adaptive market hypothesis (AMH), a recent evolution in the field of finance, advocates that market efficiency is a time-variant element. In the present study, we empirically verified the time-varying degrees of market efficiency as per the propositions of AMH in the Indian foreign exchange market, which is assumed to provide an evolutionary alternative to the efficient market hypothesis (EMH). For the purpose, we used daily bilateral exchange rate between Indian rupee/United States dollar from January 1999 to December 2015. Statistical tests with linear and nonlinear approaches and better power properties unlike previous studies were used to trace the market efficiency. All tests employed unanimously supported time-varying nature of efficiency in foreign exchange returns, which adhere to the premise of AMH. The findings of the study confirmed market efficiency as an element which evolves with different market conditions, and thereby suggested for adoption of active portfolio management strategies for currency traders.

Foreign Exchange Market Efficiency In Botswana

AbstractThe random walk behaviour of exchange rates in Botswana’s foreign exchange market is explored by employing unit root tests. The unit root tests employed include the ADF, PP and the KPSS. This paper uses monthly data for the period 2000:01 to 2015:12. The conclusive evidence based on the unit roots tests indicates that the behaviour of the Pula against the South African Rand, Japanese Yen and the American Dollar exchange rates is consistent with the random walk process and the weak form efficiency market hypothesis. However, the Pula against the British Pound is inconsistent with the weak form efficiency market hypothesis. These results compliment those from Namibia (Mabakeng and Sheefeni, 2014). Furthermore, there is no evidence of the semi-strong form level of efficiency as revealed by the cointegration results obtained. These results corroborates with those found by Wickremasinghe (2008) and Çiçek (2014) in which weak form was found to exist whilst the semi-strong form was found not to exist. This paper has filled an important gap as it is the first study to investigate the efficiency of the foreign exchange market in Botswana.

Foreign Exchange Market Efficiency: Different Tales from Developed and Developing Markets during the Recent Financial Crisis

Foreign Exchange Market Efficiency: Different Tales from Developed and Developing Markets during the Recent Financial Crisis

How did China’s foreign exchange reform affect the efficiency of foreign exchange market?

This study compares the market efficiency of China’s onshore and offshore foreign exchange markets before and after the foreign exchange reform on August 11, 2015. We use the multifractal detrended fluctuation analysis of the onshore and offshore RMB/USD spot exchange rate series as basis. We then find that the onshore foreign exchange market before the reform has the lowest market efficiency, which increased after the reform. The offshore foreign exchange market before the reform has the highest market efficiency, which dropped after the reform. This finding implies the increased efficiency of the onshore foreign exchange market and the loss of efficiency in the offshore foreign exchange market. We also find that the offshore foreign exchange market is more efficient than the onshore market and that the gap shrank after the reform. Changes in intervention of the People’s Bank of China since the reform is a possible explanation for the changes in the efficiency of the foreign exchange market.

Testing for martingale difference hypothesis with structural breaks: Evidence from Asia–Pacific foreign exchange markets

This study tests for martingale difference hypothesis (MDH) in nine selected Foreign Exchange (FX) markets from Asia–Pacific countries. Its main contributions to the literature include: (i) it adopts recent techniques in both the Autocorrelation based and Spectrum based tests for MDH, namely; the Wild Bootstrap Automatic Variance Ratio test by Kim (2009) and the Wild Bootstrap Generalized Spectral test by Escanciano and Velasco (2006); (ii) it determines structural breaks endogenously for all the returns series using Perron (2006) unit root test with structural break, and (iii) based on the Perron results, it obtains two sub-samples and thereafter tests for MDH. Empirical result from this study shows that FX market efficiency could be inconsistent over time due to changes in policies and events. Thus, a preliminary test for the presence significant structural break may be necessary when testing for MDH.

Efficiency of Foreign Exchange Markets: The Case of Nigeria

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.

The Efficiency of Exchange Rate Market: A Case Study on Pakistan

This study investigates the efficiency of foreign exchange market in Pakistan. Based on monthly data during the period of July 2000 to October 2012 for 13 currencies against the Pak Rupee, three techniques of regression analysis are applied. The result of regression on trended data portrayed that unbiased hypothesis does not hold in the exchange rate market owing to serial correlation and non-stationary time-series data. The regression analysis with de-trended data remarked exchange rate market of Pakistan is neither efficient nor speculative. The findings of regression analysis with orthogonality experiment explored incidence of bandwagon behavior in selected currencies. The results of this study suggested that concerned authorities should reinforce information dissemination procedure and regulate unofficial currency markets activities for maintaining the efficiency of foreign exchange market in Pakistan.

Pakistan's foreign exchange market efficiency: an empirical estimation

The primary objective of this analysis is to empirically test Pakistan's foreign exchange market efficiency. This study primarily concern with the association between forward and spot exchange rate in Pakistan. To estimate the data the “Ordinary Least Squares Method” (OLS) was used. The results showed that the FSER (future spot exchange rate) correctly predict by the FER (forward exchange rate). The conclusion of this result is that foreign exchange market of Pakistan is efficient for the considered time period. Secondly above results also reveal that there is no major difference in the result of those countries which has more trade with Pakistan like USA and that of those which has less trade with Pakistan like Canada.

Foreign exchange market efficiency and profitability of trading rules: Evidence from a developing country

This paper empirically investigates market efficiency and trading rule profitability of the Ugandan foreign exchange market for the period January 1994 to June 2012. We test for market efficiency using a battery of variance ratio tests with superior size and power properties. We find that the Ugandan foreign exchange market is characterised by pricing inefficiency, except for a few brief episodes of efficiency. We also find that the Buy signals outperform the Sell signals in correctly predicting exchange rate movements, and yield higher returns. Investors can earn excess returns over a buy-and-hold strategy using trading rules but these returns diminish substantially after accounting for transaction costs. We conclude that the Ugandan foreign exchange market is generally characterised by weak-form inefficiency. However, market participants are unable to consistently exploit pricing inefficiencies due to transaction costs and time variation in the inefficiencies under changing market conditions. Our finding of time variation in market efficiency is consistent with the adaptive market hypothesis of Lo (2004).

Foreign Exchange Markets Efficiency Under Recent Crises: Evidence from the European Markets

This study investigates the European foreign exchange markets efficiency from both the within- and across-country perspectives and subsequently compared them across several recent crises. The European foreign exchange markets are generally efficient over the whole sample period. From the subsample periods analysis, September 11, 2001 event is shown to be the most disturbing event among recent crises. Surprisingly, there is little evidence of disturbance to foreign markets efficiency during the two most recent major crises namely the global financial crisis of 2008/09 and the current European Sovereign Debt Crisis (ESDC). The forward bias puzzle remains a more prominent phenomenon among the advanced countries' currencies than their developing counterparts. There is also evidence showing the convergence in the efficiency condition between the European advanced and developing countries‟ currencies in the later subsample periods. There are three key contributions; one, we have updated the literature until the recent ESDC; two, our results provide comfort to policymakers that the European foreign exchange markets efficiency is least affected by the recent crises; and three, our conclusions support the notion of market efficiency in the long run.

Testing the Efficiency of Indian Foreign Exchange Market

The main objective of this paper is to examine the weak form and semi-strong form efficiency of foreign exchange market in India. The daily closing spot rates of USD/INR, EUR/INR, JPY/INR and GBP/INR for the period of ten years from 1999 to 2009 was analyzed. Augmented Dickey Fuller Test, Auto Correlation, Runs Test, Johansen Co Integration Test and Granger Causality Test confirms the weak form and semi-strong efficiency of Foreign Exchange Market in India.

Foreign exchange market efficiency under recent crises: Asia-Pacific focus

The Asia-Pacific region’s currency markets are generally efficient within-country when tested using the Johansen (1991, 1995) cointegration technique whereas market efficiency fails to hold when tested using Fama’s (1984) conventional regression. Using the Pilbeam and Olmo (2011) model, we reconcile these conflicting findings. The Pilbeam and Olmo (2011) model confirms within-country market efficiency. It further confirms that free-float currency markets are more resilient than managed-float currency markets among 12 Asia-Pacific economies. From the across-country perspective, the foreign exchange markets are mostly efficient and the results show that the 1997–1998 Asian financial crisis was a more disturbing event than the 2008–2009 global financial crisis in the region.

Multi-Scale Approximate Entropy Analysis of Foreign Exchange Markets Efficiency

Market efficiency analysis is an important aspect in financial engineering.Based on weak-form efficient markets hypothesis (EMH), we characterize the market efficiency in foreign exchange (FX) markets by using the multi-scale approximate entropy (MApEn) to assess the randomness in FX markets. We split 17 daily FX rates from 1984 to 2011 into there periods by two global events, Southeast Asia currency crisis and American sub-prime crisis. The empirical results indicate that the developed FX markets is more efficient than emerging FX markets, and that the financial crisis promotes the market efficiency in FX markets significantly, especially in emerging markets, like China, Hong Kong, Korea and African market.

Foreign Exchange Markets Efficiency: Asia-Pacific Focus

Foreign Exchange Markets Efficiency: Asia-Pacific Focus

Weak-Form Efficiency of Foreign Exchange Market in the Organisation for Economic Cooperation and Development Countries: Unit Root Test

This paper will look at the weak-form efficiency of the foreign exchange market in thirty (30) Organization forEconomic Cooperation and Development (OECD) countries. We employ Augmented Dickey-Fuller (ADF),Philip-Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin analysis to examine for the unit root. Using weeklydata for the period 2000 to 2007, the results for weak-form efficiency using ADF and PP tests indicate that theexchange rates studied follow random walks. The current value of the exchange rate cannot be predicted using itspast values. In addition, the OECD foreign exchange market consistent with the weak-form of the Efficient MarketHypothesis.

Uncovered interest parity and the efficiency of the foreign exchange market: a re-examination of the evidence

In this paper, we find that the traditional approach to testing UIP is misleading because of the significant difference in volatility between the change in the log of the exchange rates and the forward premium, and also because of the presence of conditional heteroskedasticity in the data. This difference has an effect on the estimates of the relevant slope parameter and on the estimates of the uncertainty about the parameter. We show by means of a bootstrap simulation experiment that the econometric rejections of UIP can be spurious and that an alternative methodology is needed to test for foreign exchange markets efficiency. We introduce a set of more direct and economically meaningful profitability-based tests of market efficiency based on UIP. Our results are far more favourable than the existing literature to foreign exchange market efficiency