IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpif/0406004.html
   My bibliography  Save this paper

Efficiency Of Foreign Exchange Markets: A Developing Country Perspective

Author

Listed:
  • Guneratne Banda Wickremasinghe

    (Monash University)

Abstract

This study tests weak and semi-strong form efficiency of the foreign exchange market in Sri Lanka using six bilateral foreign exchange rates during the recent float. Weak-form efficiency is examined using unit root tests while semi-strong form efficiency is tested using co- integration and Granger causality tests and variance decomposition analysis. Results indicate that the Sri Lankan foreign exchange market is consistent with the weak -form of the Efficient Market Hypothesis. However, the results provide evidence against the semi - strong version of the Efficient Market hypothesis. These results have important implications for government policy makers and participants in the foreign exchange market of Sri Lanka.

Suggested Citation

  • Guneratne Banda Wickremasinghe, 2004. "Efficiency Of Foreign Exchange Markets: A Developing Country Perspective," International Finance 0406004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0406004
    Note: Type of Document - pdf; pages: 24
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0406/0406004.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Michael Bleaney, 1998. "Market Efficiency and Apparent Unit Roots: An Application to Exchange Rates," The Economic Record, The Economic Society of Australia, vol. 74(225), pages 139-144, June.
    4. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 631-653.
    5. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
    6. Johansen, Soren, 1992. "Determination of Cointegration Rank in the Presence of a Linear Trend," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 383-397, August.
    7. Barnhart, Scott W. & McNown, Robert & Wallace, Myles S., 1999. "Non-Informative Tests of the Unbiased Forward Exchange Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(2), pages 265-291, June.
    8. Liu, Christina Y & He, Jia, 1991. "A Variance-Ratio Test of Random Walks in Foreign Exchange Rates," Journal of Finance, American Finance Association, vol. 46(2), pages 773-785, June.
    9. Sarwar, Ghulam, 1997. "Efficiency of black markets in foreign currencies in Southeast Asia," Journal of Multinational Financial Management, Elsevier, vol. 7(4), pages 333-344, December.
    10. repec:bla:ecorec:v:74:y:1998:i:225:p:139-44 is not listed on IDEAS
    11. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    12. Jose Sanchez-Fung, 1999. "Efficiency of the black market for foreign exchange and PPP: the case of the Dominican Republic," Applied Economics Letters, Taylor & Francis Journals, vol. 6(3), pages 173-176.
    13. John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1.
    14. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    15. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters, in: Exchange Rate Theory and Practice, pages 121-152, National Bureau of Economic Research, Inc.
    16. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    17. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    18. Taylor, Mark P, 1988. "A DYMIMIC Model of Forward Foreign Exchange Risk, with Estimates for Three Major Exchange Rates," The Manchester School of Economic & Social Studies, University of Manchester, vol. 56(1), pages 55-68, March.
    19. Ronald Macdonald & Mark P. Taylor, 1992. "Exchange Rate Economics: A Survey," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 1-57, March.
    20. Norrbin, Stefan C. & Reffett, Kevin L., 1996. "Exogeneity and forward rate unbiasedness," Journal of International Money and Finance, Elsevier, vol. 15(2), pages 267-274, April.
    21. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
    22. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
    23. Hakkio, Craig S. & Rush, Mark, 1989. "Market efficiency and cointegration: an application to the sterling and deutschemark exchange markets," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 75-88, March.
    24. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    25. Serletis, Apostolos & King, Martin, 1997. "Common Stochastic Trends and Convergence of European Union Stock Markets," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(1), pages 44-57, January.
    26. Craig S. Hakkio & Mark Rush, 1987. "Market efficiency and cointegration," Research Working Paper 87-05, Federal Reserve Bank of Kansas City.
    27. James G. MacKinnon, 1990. "Critical Values for Cointegration Tests," Working Paper 1227, Economics Department, Queen's University.
    28. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    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. Rizwana Bashir & Rabia Shakir & Badar Ashfaq & Atif Hassan, 2014. "The Efficiency of Foreign Exchange Markets in Pakistan: An Empirical Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 133-149, Jan-June.
    2. Giannellis, Nikolaos & Papadopoulos, Athanasios P., 2009. "Testing for efficiency in selected developing foreign exchange markets: An equilibrium-based approach," Economic Modelling, Elsevier, vol. 26(1), pages 155-166, January.
    3. Andrew Phiri, 2015. "Efficient Market Hypothesis in South Africa: Evidence from Linear and Nonlinear Unit Root Tests," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 13(4 (Winter), pages 369-387.
    4. Guneratne B Wickremasinghe & Jae H Kim, 2008. "Weak-Form Efficiency of Foreign Exchange Markets of Developing Economies," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(2), pages 169-196, August.
    5. Mahamuda Firoj & Sharmina Khanom, 2018. "Efficient Market Hypothesis: Foreign Exchange Market of Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 8(6), pages 99-103.
    6. Van Heerden, Dorathea & Rodrigues, Jose & Hockly, Dale & Lambert, Bongani & Taljard, Tjaart & Phiri, Andrew, 2013. "Efficient Market Hypothesis in South Africa: Evidence from a threshold autoregressive (TAR) model," MPRA Paper 50544, University Library of Munich, Germany.
    7. Tran Mong Uyen Ngan, 2016. "Relationship between Foreign Exchange Rate and Stock Price of Commercial Joint Stock Banks: Evidence from Vietnam," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 193-193, July.
    8. Adeyeye Patrick Olufemi & Aluko Olufemi Adewale & Migiro Stephen Oseko, 2017. "Efficiency of Foreign Exchange Markets in Sub-Saharan Africa in the Presence of Structural Break: A Linear and Non-Linear Testing Approach," Journal of Economics and Behavioral Studies, AMH International, vol. 9(4), pages 122-131.
    9. Felicia Ramona Birau, 2012. "Econometric Approach Of Heteroskedasticity On Financial Time Series In A General Framework," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 74-77, December.
    10. repec:pid:wpaper:2012:82 is not listed on IDEAS
    11. Gofaone Matebejana & Gaotlhobogwe Motlaleng & James Juana, 2017. "Foreign Exchange Market Efficiency In Botswana," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 19, pages 55-74, June.

    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. Eleni Constantinou & Avo Kazandjian & Georgios P. Kouretas & Vera Tahmazian, 2008. "Common Stochastic Trends Among The Cyprus Stock Exchange And The Ase, Lse And Nyse," Bulletin of Economic Research, Wiley Blackwell, vol. 60(4), pages 327-349, October.
    2. Alexander Schätz, 2010. "Macroeconomic Effects on Emerging Market Sector Indices," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 131-169, August.
    3. Guneratne B Wickremasinghe & Jae H Kim, 2008. "Weak-Form Efficiency of Foreign Exchange Markets of Developing Economies," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(2), pages 169-196, August.
    4. Eleni Constantinou & Avo Kazandjian & George Kouretas & Vera Tahmazian, 2005. "Cointegration, causality and domestic portfolio diversification in the Cyprus Stock Exchange," Working Papers 0522, University of Crete, Department of Economics.
    5. Chien-Chiang Lee & Chun-Ping Chang, 2006. "The Long-Run Relationship Between Defence Expenditures And Gdp In Taiwan," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(4), pages 361-385.
    6. Ahmed, Walid M.A., 2008. "Cointegration and dynamic linkages of international stock markets: an emerging market perspective," MPRA Paper 26986, University Library of Munich, Germany.
    7. Dimitris Kenourgios & Aristeidis Samitas, 2005. "Testing Efficiency Of The Copper Futures Market: New Evidence From London Metal Exchange," Finance 0512010, University Library of Munich, Germany.
    8. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, June.
    9. Levent KORAP, 2008. "Exchange Rate Determination Of Tl/Us$:A Co-Integration Approach," Istanbul University Econometrics and Statistics e-Journal, Department of Econometrics, Faculty of Economics, Istanbul University, vol. 7(1), pages 24-50, May.
    10. Jose A. Lopez, 1996. "Exchange rate cointegration across central bank regime shifts," Research Paper 9602, Federal Reserve Bank of New York.
    11. Norman J. Morin, 2006. "Likelihood ratio tests on cointegrating vectors, disequilibrium adjustment vectors, and their orthogonal complements," Finance and Economics Discussion Series 2006-21, Board of Governors of the Federal Reserve System (U.S.).
    12. Maurice Kugler & Reza Ofoghi, 2005. "Does Insurance Promote Economic Growth? Evidence from the UK," Money Macro and Finance (MMF) Research Group Conference 2005 8, Money Macro and Finance Research Group.
    13. Phengpis, Chanwit & Apilado, Vince P., 2004. "Economic interdependence and common stochastic trends: A comparative analysis between EMU and non-EMU stock markets," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 245-263.
    14. Franses,Philip Hans & Dijk,Dick van & Opschoor,Anne, 2014. "Time Series Models for Business and Economic Forecasting," Cambridge Books, Cambridge University Press, number 9780521520911, January.
    15. Hirak Ray & Malay Kanti Ray & Joydeep Biswas, 2009. "Bank, Market and Economic Growth," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 10(2), pages 403-428, July.
    16. Amano, R. A. & van Norden, S., 1998. "Oil prices and the rise and fall of the US real exchange rate," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 299-316, April.
    17. Ramazan Sari & Ugur Soytas, 2006. "Income and Education in Turkey: A Multivariate Analysis," Education Economics, Taylor & Francis Journals, vol. 14(2), pages 181-196.
    18. Sunil Sharma & Neil R. Ericsson, 1998. "Broad money demand and financial liberalization in Greece," Empirical Economics, Springer, vol. 23(3), pages 417-436.
    19. Korhan Gokmenoglu & Siamand Hesami, 2019. "Real estate prices and stock market in Germany: analysis based on hedonic price index," International Journal of Housing Markets and Analysis, Emerald Group Publishing Limited, vol. 12(4), pages 687-707, April.
    20. David O. Cushman, 2000. "The failure of the monetary exchange rate model for the Canadian-U.S. dollar," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 591-603, August.

    More about this item

    Keywords

    Efficient market hypothesis; Sri Lanka; foreign exchange market; Japanese yen; Variance decomposition;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:wpa:wuwpif:0406004. 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: EconWPA The email address of this maintainer does not seem to be valid anymore. Please ask EconWPA to update the entry or send us the correct address (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    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.