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The Efficient Market Hypothesis: Is It Applicable to the Foreign Exchange Market?

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Abstract

The study analyses the applicability of the efficient market hypothesis to the foreign exchange market by testing the profitability of the filter rule on the spot market. The significance of the returns was validated by comparing them to the returns from randomly generated shuffled series via bootstrap methods. The results were surprising. For the total period (1984-2003) small filter rules could deliver significant returns indicating an inefficient foreign exchange market. However, once the data was separated into four sub-periods of five years to test the stability of the returns, the results indicate that only the first sub period delivered significant returns. In the last two sub periods or ten years, the returns from employing filter rules were negative. This supports the conclusion that the efficient market hypothesis is valid in the foreign exchange market.

Suggested Citation

  • Nguyen, James, 2004. "The Efficient Market Hypothesis: Is It Applicable to the Foreign Exchange Market?," Economics Working Papers wp04-20, School of Economics, University of Wollongong, NSW, Australia.
  • Handle: RePEc:uow:depec1:wp04-20
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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow012181.pdf
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    References listed on IDEAS

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    6. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    7. Norbert Fiess & Ronald MacDonald, 1999. "Technical Analysis in the Foreign Exchange Market: A Cointegration-Based Approach," Multinational Finance Journal, Multinational Finance Journal, vol. 3(3), pages 147-172, September.
    8. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    9. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    10. Carol L. Osler, 2000. "Support for resistance: technical analysis and intraday exchange rates," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-68.
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    Keywords

    Efficient market hypothesis; foreign exchange market; filter rules;

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