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Simple measures of market efficiency: A study in foreign exchange markets

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  • Kitamura, Yoshihiro

Abstract

Previous studies on the stock market consider the degree of market efficiency to be an inverse of the predictive power of order flow. Following this notion, I propose simple market efficiency measures in foreign exchange (FX) markets. The first measure considers the market to be inefficient when positive (negative) order flows predict the appreciation (depreciation) of a base currency. The second measure considers whether predictions using order flow result in tangible gains. These measures are related to liquidity levels and information factors in FX markets, unlike the measures in previous studies.

Suggested Citation

  • Kitamura, Yoshihiro, 2017. "Simple measures of market efficiency: A study in foreign exchange markets," Japan and the World Economy, Elsevier, vol. 41(C), pages 1-16.
    • Handle: RePEc:eee:japwor:v:41:y:2017:i:c:p:1-16
    DOI: 10.1016/j.japwor.2016.11.001
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    Cited by:

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    2. Sashikanta Khuntia & J. K. Pattanayak, 2020. "Evolving Efficiency of Exchange Rate Movement: An Evidence from Indian Foreign Exchange Market," Global Business Review, International Management Institute, vol. 21(4), pages 956-969, August.
    3. Firouzi, Shahrokh & Wang, Xiangning, 2021. "The interrelationship between order flow, exchange rate, and the role of American economic news," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    4. Yang, Yan-Hong & Shao, Ying-Hui & Shao, Hao-Lin & Stanley, H. Eugene, 2019. "Revisiting the weak-form efficiency of the EUR/CHF exchange rate market: Evidence from episodes of different Swiss franc regimes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 734-746.

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    More about this item

    Keywords

    Liquidity; Information asymmetry; Market efficiency; Order flows; Stealth trading;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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