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Testing for Efficiency in Selected Developing Foreign Exchange Markets: An Equilibrium-based Approach

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Author Info
Nikolaos Giannellis () (Department of Economics, University of Crete, Greece)
Athanasios Papadopoulos () (Department of Economics, University of Crete, Greece)

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Abstract

This paper proposes an alternative way of testing FOREX efficiency for developing countries. The FOREX market will be efficient if fully reflects all available information. If this holds, the actual exchange rate will not deviate significantly from its equilibrium rate. Moreover, the spot rate should deviate from its equilibrium rate by only transitory components (i.e. it should follow a white noise process). This test is applied to three Central & Eastern European Countries – members of the EU. Considering an LSTAR model we find no evidence of nonlinear adjustment in the misalignment series. So, linear unit root tests imply that the Poland/Euro FOREX market is efficient, the Czech/Euro FOREX market is not, while the Slovak/Euro FOREX market is quasi-efficient.

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Publisher Info
Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0717.

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Length: 33 pages
Date of creation: 30 Oct 2006
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Handle: RePEc:crt:wpaper:0717

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Related research
Keywords: FOREX efficiency; BEER; Linearity test; Unit Root.;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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