IDEAS home Printed from https://ideas.repec.org/a/ate/journl/ajbev4i3-4.html
   My bibliography  Save this article

How Efficient is the Foreign Exchange Market?

Author

Listed:
  • Ioannis N. Kallianiotis

Abstract

In this paper, we try to measure the degree of efficiency in the foreign exchange market by using four exchange rates ($/€, $/£, C$/$, and ¥/$). Different theoretical models are applied, like the random walk hypothesis, the unbiased forward rate hypothesis, the composite efficiency hypothesis, the semi-strong market efficiency, and the exchange rate expectations based on anticipated and unanticipated events ("News"). If exchange rate efficiency does not hold, a risk premium must exist and can be measured. Also, the determination of this exchange risk premium is taking place by using a GARCH (p, q) model. The empirical results for these four major exchange rates (five currencies) show that relative efficiency exists, but there are significant risk premia for some exchange rates used, here

Suggested Citation

  • Ioannis N. Kallianiotis, 2018. "How Efficient is the Foreign Exchange Market?," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 4(3), pages 293-326, July.
  • Handle: RePEc:ate:journl:ajbev4i3-4
    DOI: 10.30958/ajbe.4-3-4
    as

    Download full text from publisher

    File URL: https://www.athensjournals.gr/business/2018-4-3-4-Kallianiotis.pdf
    Download Restriction: no

    File URL: https://libkey.io/10.30958/ajbe.4-3-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    2. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-381, May.
    3. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    4. Frenkel, Jacob A. & Razin, Assaf, 1980. "Stochastic prices and tests of efficiency of foreign exchange markets," Economics Letters, Elsevier, vol. 6(2), pages 165-170.
    5. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
    6. Peter Isard, 1980. "Factors determining exchange rates: the roles of relative price levels, balances of payments, interest rates and risk," BIS Working Papers 4, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gregory T. Papanikos, 2022. "Greece in the Eurozone: An Evaluation of the First Two Decades," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 8(2), pages 177-192, April.
    2. Azzam, Islam & El-Masry, Ahmed A. & Yamani, Ehab, 2023. "Foreign exchange market efficiency during COVID-19 pandemic," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 717-730.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ioannis N. Kallianiotis, 2021. "Exchange Rate Determination: The Portfolio-Balance Approach," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 11(1), pages 1-2.
    2. Ioannis N. Kallianiotis, 2017. "Tests of Efficiency in the Foreign Exchange Market," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(10), pages 218-239, 10-2017.
    3. Richard M. Levich, 1983. "Empirical Studies of Exchange Rates: Price Behavior, Rate Determinationand Market Efficiency," NBER Working Papers 1112, National Bureau of Economic Research, Inc.
    4. M. Manzur, 1990. "Key Issues in Exchange Rate Economics," Economics Discussion / Working Papers 90-07, The University of Western Australia, Department of Economics.
    5. Michael L. Mussa, 1984. "The Theory of Exchange Rate Determination," NBER Chapters, in: Exchange Rate Theory and Practice, pages 13-78, National Bureau of Economic Research, Inc.
    6. Alagidede, Paul & Panagiotidis, Theodore, 2009. "Modelling stock returns in Africa's emerging equity markets," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 1-11, March.
    7. Nguyen, Tien-Trung & Wu, Yang-Che & Ke, Mei-Chu & Liao, Tung Liang, 2022. "Can direct government intervention save the stock market?," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 271-284.
    8. Dutta, Shantanu & Essaddam, Naceur & Kumar, Vinod & Saadi, Samir, 2017. "How does electronic trading affect efficiency of stock market and conditional volatility? Evidence from Toronto Stock Exchange," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 867-877.
    9. THOMAS H. McCURDY & IEUAN G. MORGAN, 1992. "Single Beta Models and Currency Futures Prices," The Economic Record, The Economic Society of Australia, vol. 68(S1), pages 117-129, December.
    10. Milionis, Alexandros E., 2007. "Efficient capital markets: A statistical definition and comments," Statistics & Probability Letters, Elsevier, vol. 77(6), pages 607-613, March.
    11. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    12. Bosi, Stefano & Fontaine, Patrice & Le Van, Cuong, 2016. "Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets," Mathematical Social Sciences, Elsevier, vol. 82(C), pages 26-36.
    13. Edwards, Sebastian, 1983. "Floating exchange rates, expectations and new information," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 321-336.
    14. Kunze, Frederik, 2017. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," University of Göttingen Working Papers in Economics 326, University of Goettingen, Department of Economics.
    15. RONALD I. McKINNON, 1990. "Interest Rate Volatility And Exchange Risk: New Rules For A Common Monetary Standard," Contemporary Economic Policy, Western Economic Association International, vol. 8(2), pages 1-17, April.
    16. George Ogum & Francisca Beer & Genevieve Nouyrigat, 2005. "Emerging Equity Market Volatility Ab Empirical Investigation Of Markets In Kenya Nigeria," Post-Print hal-04533527, HAL.
    17. Timmermann, Allan & Granger, Clive W. J., 2004. "Efficient market hypothesis and forecasting," International Journal of Forecasting, Elsevier, vol. 20(1), pages 15-27.
    18. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    19. Alan G. Futerman, 2021. "Passive money system and control of exchange rates: The case of Argentina 1976–1981," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5512-5530, October.
    20. Ilu, Ahmad Ibraheem, 2020. "Exchange Rate Pass through to Stock Prices: A Multi GARCH Approach," MPRA Paper 98442, University Library of Munich, Germany.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ate:journl:ajbev4i3-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Afrodete Papanikou (email available below). General contact details of provider: https://www.athensjournals.gr .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.