A Study on Indian Foreign Exchange Market Efficiency

A Study on Indian Foreign Exchange Market Efficiency

Information has always been a constant force for change and improvisation and this particular aspect of the information was study with reference to the stock markets by Prof. Eugene Fama at the university of Chicago booth school of business as part of his Ph.D. thesis work. Now as per his work the financial markets are "informationally efficient". And the resultant effect of this is that, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or "insider" information This main purpose behind this research study is to test for the weak form efficiency of the Indian foreign exchange market and for this purpose daily exchange rate of four nominal exchange rates which are US Dollar, Japanese Yen, Euro, and Pound Sterling from April 2004 to December 2011 are analyzed using unit root tests of Augmented Dickey Fuller Test and Phillip Perron test. As per the results all the exchange rate currencies such as US dollar, Japanese Yen, Euro, and Pound Sterling are found to be stationary in 1st difference. This implies that all exchange rate currencies support the hypothesis of weak form inefficiency and information of any nature that can have a impact on the market will take more time to reflect or create an impact on the prices or rates existing in the market, so this time gap and the constant movement of change between the data points can be used to create a pattern of movement or before the market could adjust, investors by assuming the future change will also be constant as it has been in the past can take advantage of the available information and therefore it becomes easy for the investors to forecast or predict the future exchange rates of respective currencies with the use of past data and thereby leading to super normal profits.

K. J Anson

Commerce