EFFICIENCY OF FOREIGN EXCHANGE MARKETSA DEVELOPING COUNTRY PERSPECTIVE 外汇市场效率：发展中国家的视角.pdf

Asian Academy of Management Journal, Vol. 10, No. 1, 1–17, January 2005 EFFICIENCY OF FOREIGN EXCHANGE MARKETS: A DEVELOPING COUNTRY PERSPECTIVE Guneratne B Wickremasinghe Department of Econometrics Business Statistics Monash University, Cualfield Victoria, 3145 Australia e-mail: guneratne.wickremasinghe@buseco.monash.edu.au ABSTRACT This study tests weak and semi-strong form efficiency of the foreign exchange market in Sri Lanka during the recent float using six bilateral exchange rates. Weak-form efficiency is examined using unit root tests while semi-strong form efficiency is tested using co- integration, Granger causality tests and variance decomposition analysis. Results indicate that the Sri Lankan foreign exchange market is consistent with the weak-form of the efficient market hypothesis (EMH). However, the results provide evidence against the semi-strong version of the EMH. These results have important implications for government policy makers and participants in the foreign exchange market of Sri Lanka. Keywords: efficient market hypothesis (EMH), Sri Lanka, foreign exchange market, Japanese yen, variance decomposition JEL Classifications: F31, G14 ACKNOWLEDGEMENTS The author wishes to thank Mrs R. Dheerasinghe of the Central Bank of Sri Lanka for providing the data and two anonymous referees of this journal for their very valuable comments to improve the paper. However, all errors remain the sole responsibility of the author. INTRODUCTION The efficient market hypothesis (EMH) originally due to Fama (1965) asserts that in an efficient market, prices always fully reflect available information. EMH has three forms; weak, semi-strong and strong reflecting different degrees of