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Efficiency of the Foreign Exchange Market of Papua New Guinea During the Recent Float

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  • Guneratne Banda Wickremasinghe

    (Monash University)

Abstract

This paper examines the validity of the efficient market hypothesis (EMH) for the foreign exchange market of Papua New Guinea (PNG) using data on spot exchange rates for four major foreign currencies during the recent float. The unit root test results indicate that all the four exchange rates are random walks supporting the weak-form of the EMH. However, the Johansen multivariate cointegration test, the Granger causality test and variance decomposition analysis provide evidence that there are long-run as well as short-run predictable relationships among the spot exchange rates, refuting the validity of EMH in its semi-strong form. Further, evidence is found that the Australian dollar plays a vital role in driving the movements of exchange rates in PNG. These results have important implications for participants in the foreign exchange market and policy makers in PNG.

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File URL: http://128.118.178.162/eps/it/papers/0406/0406007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 0406007.

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Length: 19 pages
Date of creation: 22 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpit:0406007

Note: Type of Document - pdf; pages: 19
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Web page: http://128.118.178.162

Related research

Keywords: Efficient market hypothesis; Papua New Guinea; foreign exchange market; Japanese yen; Variance decomposition;

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  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. Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-81, March.
  3. Boothe, Paul & Longworth, David, 1986. "Foreign exchange market efficiency tests: Implications of recent empirical findings," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 135-152, June.
  4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  5. Bleaney, Michael, 1998. "Market Efficiency and Apparent Unit Roots: An Application to Exchange Rates," The Economic Record, The Economic Society of Australia, vol. 74(225), pages 139-44, June.
  6. Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 255-274, January.
  7. 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 1057-72, June.
  8. Sebastian Edwards, 1983. "Floating Exchange Rates, Expectations and New Information," NBER Working Papers 1064, National Bureau of Economic Research, Inc.
  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  11. Craig S. Hakkio & Mark Rush, 1987. "Market efficiency and cointegration," Research Working Paper 87-05, Federal Reserve Bank of Kansas City.
  12. 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(02), pages 265-291, June.
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