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

  • Nikolaos Giannellis

    ()

    (Department of Economics, University of Crete, Greece)

  • Athanasios Papadopoulos

    ()

    (Department of Economics, University of Crete, Greece)

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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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
Date of revision:
Handle: RePEc:crt:wpaper:0717
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