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A Test Of The Efficiency Of The Foreign Exchange Market In Indonesia

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  • Bernard Njindan Iyke

    (Deakin Business School, Deakin University)

Abstract

We test whether the Indonesian foreign exchange market is efficient. Since empirical evidence has been inconclusive, we employ a new generalized autoregressive conditional heteroskedasticity–based unit root test to examine the Efficient Market Hypothesis (EMH). The advantages of this model are that it accommodates two endogenous structural breaks and heteroskedasticity. Tests that account for structural breaks reject the EMH in only 29% of cases. When we accommodate both structural breaks and heteroskedasticity, we find the EMH is rejected in 50% of cases. Finally, we examine the half-life of exchange rates and find that 71% of rates revert to equilibrium within a month.

Suggested Citation

  • Bernard Njindan Iyke, 2019. "A Test Of The Efficiency Of The Foreign Exchange Market In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 21(12th BMEB), pages 439-464, January.
    • Handle: RePEc:idn:journl:v:1:y:2019:i:sp1:p:439-464
    DOI: https://doi.org/10.21098/bemp.v0i0.976
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    More about this item

    Keywords

    Foreign Exchange Market Efficiency; Exchange Rate; Unit Root; Structural Break; Half-life; Indonesia;
    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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