Weak efficiency of foreign exchange rates

Abstract

The efficient market hypothesis (EMH) concept has been fundamental in financial economics, proposing that financial markets accurately reflect all available information. However, empirical studies have raised questions about the degree of efficiency in various financial markets, including the foreign exchange market. This thesis focuses on the weak efficiency of foreign exchange rates, which implies that current exchange rates reflect past exchange rate information but not non-public or non-historical information. The study explores the presence of unit roots and cointegration relationships and utilizes Error Correction Models (ECMs) to assess the efficiency of foreign exchange rates. The empirical analysis covers 6,200 daily observations of ten exchange rates between January 1999 to March 2023. The study finds evidence of nonstationarity in the series, cointegration relationships among some exchange rates, and speed of adjustment back to equilibrium after a shock. These findings provide insights into the weak efficiency of various foreign exchange rates and include implications for market participants, policymakers, and investors.