FOREIGN EXCHANGE MARKET EFFICIENCY ACROSS COUNTRIES AND WITHIN SRI LANKA

Abstract

A market is considered to be efficient, if it fully and correctly reflect all available information in determining asset prices which is referred to as the Efficient Market Hypothesis. If markets are efficient, no arbitrage profits could be exploited. The first objective of the study is to investigate the foreign exchange market efficiency among six currencies in the South and East Asia using their respective spot exchange rates. The results revealed that all foreign exchange market pairs in the sample except India and Sri Lanka are not co-integrated thus providing evidence of market efficiency across those countries. Within country efficiency is tested only for Sri Lanka by investigating the co-integration between 1-month forward exchange rates and the corresponding future spot rate. The empirical findings proved that 1-month forward exchange rate and spot rate are co-integrated; indicating Sri Lanka’s foreign exchange market is efficient.

Keywords: Foreign exchange markets, Spot Exchange rate, Forward Exchange Rate, Efficiency

For full paper: fmscresearch@sjp.ac.lk