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Weak-Form Efficiency of Foreign Exchange Markets of Developing Economies

Author

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  • Guneratne B Wickremasinghe

    (Guneratne B Wickremasinghe is Senior Lecturer, School of Accounting and Finance and the Centre for Strategic Economic Studies, Victoria University, PO Box 14428, Melbourne, VIC 8001, Australia. Email: guneratne.wickremasinghe@vu.edu.au)

  • Jae H Kim

    (Jae H Kim is Senior Lecturer, Department of Econometrics and Business Statistics, Monash University, Caulfield East, VIC 3145, Australia. Email: Jae.kim@buseco.monash.edu.au)

Abstract

This study examines the empirical validity of the weak-form Efficient Market Hypothesis (EMH) for the foreign exchange market of Sri Lanka, using a battery of (univariate and panel) unit root tests, including those that allow for structural breaks. Monthly exchange rates for four major currencies (Indian rupee, UK pound, US dollar and Japanese yen) vis–à –vis the Sri Lankan rupee are considered in the empirical analysis. The results indicate that the four exchange rates studied follow a random walk, thus supporting the validity of the weak-form EMH. These results have strong implications for the participants of the foreign exchange market of Sri Lanka and government policy makers.

Suggested Citation

  • 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.
    • Handle: RePEc:sae:emffin:v:7:y:2008:i:2:p:169-196
    DOI: 10.1177/097265270800700203
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    References listed on IDEAS

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    2. Abounoori, Esmaiel & Shahrazi, Mahdi & Rasekhi, Saeed, 2012. "An investigation of Forex market efficiency based on detrended fluctuation analysis: A case study for Iran," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(11), pages 3170-3179.

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    More about this item

    Keywords

    Efficient market hypothesis; exchange rates; unit root tests; panel data; structural breaks; JEL Classification: F31; JEL Classification: G14;
    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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