The Efficiency of Exchange Rate Market: A Case Study on Pakistan

Zobia Israr Ahmed

doi:doi:10.11648/j.ijefm.20150302.17

| Peer-Reviewed

The Efficiency of Exchange Rate Market: A Case Study on Pakistan

Zobia Israr Ahmed

Published in International Journal of Economics, Finance and Management Sciences (Volume 3, Issue 2)

Received: 20 February 2015 Accepted: 13 March 2015 Published: 18 March 2015

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

This study investigates the efficiency of foreign exchange market in Pakistan. Based on monthly data during the period of July 2000 to October 2012 for 13 currencies against the Pak Rupee, three techniques of regression analysis are applied. The result of regression on trended data portrayed that unbiased hypothesis does not hold in the exchange rate market owing to serial correlation and non-stationary time-series data. The regression analysis with de-trended data remarked exchange rate market of Pakistan is neither efficient nor speculative. The findings of regression analysis with orthogonality experiment explored incidence of bandwagon behavior in selected currencies. The results of this study suggested that concerned authorities should reinforce information dissemination procedure and regulate unofficial currency markets activities for maintaining the efficiency of foreign exchange market in Pakistan.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 3, Issue 2)
DOI	10.11648/j.ijefm.20150302.17
Page(s)	125-137
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2015. Published by Science Publishing Group

Keywords

Pakistan Exchange Rate Market, Market Efficiency, Fama Regression Analysis

References

[1]	Ahmed, H. 2009.Capital flows and real exchange rate overvaluation-a chronic ailment: Evidence from Pakistan. The Lahore Journal of Economics, 14: 51-86.
[2]	Ahmed, K. M., Ashraf, S., & Ahmed, S. 2007. Efficiency of foreign exchange markets: Evidence from south Asian countries. Indian Journal of Economics, 88(3): 17-33.
[3]	Ahmad, R., Rhee, S. G., & Wong, Y. M. 2012. Foreign exchange market efficiency under recent crises: Asia-pacific focus. Journal of International Money and Finance, 31(6): 1574-1592.
[4]	Alajbeg, D., Bubaš, Z. & Šonje, V. 2012. The efﬁcient market hypothesis: problems with interpretations of empirical tests. Financial Theory and Practice, 36(1): 53-72.
[5]	Akinlo, A. E. (2004). Foreign direct investment and growth in Nigeria: An empirical investigation. Journal of Policy Modeling, 26, 627–639.
[6]	Bhatti, R. H. 1997. Do expectations play any role in determining Pak rupee exchange rates? The Pakistan Development Review, 36(3): 263-273.
[7]	Bilson, J. F. O. 1981. The Speculative efficiency hypothesis. Journal of Business, 54(3): 435-451.
[8]	Bilson, J. F. O. 1985. Macroeconomic stability and flexible exchange rates. The American Economic Review, 75(2): 62-67.
[9]	Burton G. M. 2003. The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17(1): 59-82.
[10]	Chaudhry, S. A., & Javid, A. Y. 2012. Efficiency of the foreign exchange markets of South Asian countries. PIDE Working Paper, 2012(82).
[11]	Cheung, Y.-W., & Wong, C. Y.-P. 2000. A survey of market practitioners’ views on exchange rate dynamics. Journal of International Economics, 51: 401-419.
[12]	Cheung, Y.-W., & Chinn, M. D. 2001. Currency traders and exchange rate dynamics: a survey of the US market. Journal of International Money and Finance, 20: 439-471.
[13]	Chinn, M. D., & Frankel, J. A. 2002. Survey data on exchange rate expectations: More currencies, more horizons, more tests. Monetary policy, capital flows and exchange rates: essays in honor of Maxwell Fry.-London, 145-167.
[14]	Edwards, S. (1989). "Exchange rate misalignment in developing countries." The World Bank Research Observer 4(1): 3-21.
[15]	Ego, M.A, & Sebudde, R. K. 2003. Measuring efficiency of a market in transition: The Ugandan foreign exchange market. Research series No. 33, Bank of Uganda.
[16]	Fama. E. F. 1965. The behavior of stock-market prices. Journal of Business, 38(1): 34-105.
[17]	Fama. E. F. 1984. Forward and spot exchange rates. Journal of Monetary Economics, 14: 319-338.
[18]	Fama. E. F. 1991. Efficient markets: II. Journal of Finance, (5th Anniversary Invited Paper), 46:1575-1617.
[19]	Fama. E. F. 1998. Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49: 283-306.
[20]	Frankel, J. A., & Chinn, M. D. 1993. Exchange rate expectations and the risk premium: Tests for a cross section of 17 currencies. Review of International Economics, 1(2): 136-144.
[21]	Hai, W., Mark, N. C., & Wu, Y. 1997. Understanding spot and forward exchange rate regressions. Journal of Applied Econometrics, 12: 715-734.
[22]	Hamid, K., Suleman, M. T., Shah, S. Z. I., & Akash, R. S. I. 2010. Testing the weak form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets. International Research Journal of Finance and Economics, ISSN 1450-2887: 58.
[23]	Hansen, L. P., & Hordick, R. J. 1983. Risk averse speculation in the forward foreign exchange market: An econometric analysis of linear models. University of Chicago Press, ISBN: 0-226-262 50-2: 113-152.
[24]	International Monetary Fund website, www.imf.org
[25]	Lee, Y.-H., & Khatanbaatar, S. (2012). Efficiency tests in foreign exchange market. International Journal of Economics and Financial Issues, 2(2), 216–224.
[26]	Levich, R. M. 1979. Analyzing the accuracy of foreign exchange advisory services: Theory and evidence. National Bureau of Economic Research, working paper no. 336.
[27]	Meng, W. Y. & Ahmed, R. 2011. Foreign exchange market efficiency in Asia Pacific: 1997-2010. European Financial Management Symposium 2011 Asian Financial Management.
[28]	Ministry of Finance, Government of Pakistan website, www.finance.gov.pk
[29]	Nasir, S., & Hanif, M. 2012. Testing weak form of efficient market hypothesis: empirical evidence from South-Asia. World Applied Sciences Journal, 17(4): 414-427.
[30]	Noman, A. M., & Ahmed, M. U. 2008. Efficiency of the foreign exchange markets in south Asian countries. AIUB Business & Economics Working Paper Series, 2008(18).
[31]	Oh, G., Kim, S., & Eom, C. (2007). Market efficiency in foreign exchange markets. Physica A: Statistical Mechanics and its Applications, 382(1), 209–212.
[32]	Pilbeam, K. 1991. Exchange Rate Management: Theory and Evidence, London: Macmillan.
[33]	Polito, E. 2001. Is the forward exchange rate a useful indicator of the future exchange rate? Issues in Political Economy, 2001(10).
[34]	Rapp, T. A., & Sharma, S. C. 1999. Exchange rate market efficiency: Across and within countries. Journal of Economics and Business, 51: 423-439.
[35]	Rose, N. W., Kisaka, S. E., Ganesh, P., & Gituro, W. 2008. An analysis of the efficiency the foreign exchange market in Kenya. Economics Bulletin, 14(2): 1-13.
[36]	Sasikumar, A. 2011. Testing for weak form market efficiency in Indian foreign exchange market. Munich Personal RePEc Archive, Paper No. 37071.
[37]	Sewell, M. 2011. History of the efficient market hypothesis. University College London-Department of Computer Science, RN/11/04: 1-14.
[38]	Siddiqui, M. A. 2009. Modelling pak rupee volatility against five major currencies in the perspective of different exchange rate regimes. European Journal of Economics, Finance And Administrative Sciences, ISSN 1450-2275 Issue 17: 81-96.
[39]	Siddiqui, R., & Akhtar, N. 1999. The impact of changes in exchange rate on prices: a case study of Pakistan. The Pakistan Development Review, 38(4 Part II): 1059-1066.
[40]	Stefan, I. 2009. Testing the efficient markets hypothesis: A behavioral approach to the current economic crisis. Senior Honors Thesis. University Of California.
[41]	Timmermann, A. & Granger, C. W. J. 2004. Efficient market hypothesis and forecasting. International Journal of Forecasting, 20: 15-27.
[42]	Trading Economics website, www.tradingeconomics.com
[43]	Waheed, M. 2009. Forward rate unbiased hypothesis, risk premium and exchange rate expectations: estimates on Pakistan Rupee-US Dollar. Munich Personal RePEc Archive, Paper No. 33167.
[44]	Wickremasinghe, G. B. 2005. Efficiency of foreign exchange markets: A developing country perspective. Asian Academy of Management Journal, 10: 1-17.
[45]	Wickremasinghe, G. B. 2008. Predictability of exchange rates in Sri Lanka: A test of the efficient market hypothesis. Asian Academy of Management Journal of Accounting and Finance, 3(2): 43-59.
[46]	World Bank website, www.worldbank.com

Cite This Article

Plain Text BibTeX RIS

APA Style

Zobia Israr Ahmed. (2015). The Efficiency of Exchange Rate Market: A Case Study on Pakistan. International Journal of Economics, Finance and Management Sciences, 3(2), 125-137. https://doi.org/10.11648/j.ijefm.20150302.17

Copy | Download

ACS Style

Zobia Israr Ahmed. The Efficiency of Exchange Rate Market: A Case Study on Pakistan. Int. J. Econ. Finance Manag. Sci. 2015, 3(2), 125-137. doi: 10.11648/j.ijefm.20150302.17

Copy | Download

AMA Style

Zobia Israr Ahmed. The Efficiency of Exchange Rate Market: A Case Study on Pakistan. Int J Econ Finance Manag Sci. 2015;3(2):125-137. doi: 10.11648/j.ijefm.20150302.17

Copy | Download

@article{10.11648/j.ijefm.20150302.17,
  author = {Zobia Israr Ahmed},
  title = {The Efficiency of Exchange Rate Market: A Case Study on Pakistan},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {3},
  number = {2},
  pages = {125-137},
  doi = {10.11648/j.ijefm.20150302.17},
  url = {https://doi.org/10.11648/j.ijefm.20150302.17},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20150302.17},
  abstract = {This study investigates the efficiency of foreign exchange market in Pakistan. Based on monthly data during the period of July 2000 to October 2012 for 13 currencies against the Pak Rupee, three techniques of regression analysis are applied. The result of regression on trended data portrayed that unbiased hypothesis does not hold in the exchange rate market owing to serial correlation and non-stationary time-series data. The regression analysis with de-trended data remarked exchange rate market of Pakistan is neither efficient nor speculative. The findings of regression analysis with orthogonality experiment explored incidence of bandwagon behavior in selected currencies. The results of this study suggested that concerned authorities should reinforce information dissemination procedure and regulate unofficial currency markets activities for maintaining the efficiency of foreign exchange market in Pakistan.},
 year = {2015}
}

Copy | Download

TY  - JOUR
T1  - The Efficiency of Exchange Rate Market: A Case Study on Pakistan
AU  - Zobia Israr Ahmed
Y1  - 2015/03/18
PY  - 2015
N1  - https://doi.org/10.11648/j.ijefm.20150302.17
DO  - 10.11648/j.ijefm.20150302.17
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 125
EP  - 137
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20150302.17
AB  - This study investigates the efficiency of foreign exchange market in Pakistan. Based on monthly data during the period of July 2000 to October 2012 for 13 currencies against the Pak Rupee, three techniques of regression analysis are applied. The result of regression on trended data portrayed that unbiased hypothesis does not hold in the exchange rate market owing to serial correlation and non-stationary time-series data. The regression analysis with de-trended data remarked exchange rate market of Pakistan is neither efficient nor speculative. The findings of regression analysis with orthogonality experiment explored incidence of bandwagon behavior in selected currencies. The results of this study suggested that concerned authorities should reinforce information dissemination procedure and regulate unofficial currency markets activities for maintaining the efficiency of foreign exchange market in Pakistan.
VL  - 3
IS  - 2
ER  -

Copy | Download

Author Information

Zobia Israr Ahmed

Department of Economics, University of Karachi, Karachi, Pakistan

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Zobia Israr Ahmed. (2015). The Efficiency of Exchange Rate Market: A Case Study on Pakistan. International Journal of Economics, Finance and Management Sciences, 3(2), 125-137. https://doi.org/10.11648/j.ijefm.20150302.17

Copy | Download

ACS Style

Zobia Israr Ahmed. The Efficiency of Exchange Rate Market: A Case Study on Pakistan. Int. J. Econ. Finance Manag. Sci. 2015, 3(2), 125-137. doi: 10.11648/j.ijefm.20150302.17

Copy | Download

AMA Style

Zobia Israr Ahmed. The Efficiency of Exchange Rate Market: A Case Study on Pakistan. Int J Econ Finance Manag Sci. 2015;3(2):125-137. doi: 10.11648/j.ijefm.20150302.17

Copy | Download

@article{10.11648/j.ijefm.20150302.17,
  author = {Zobia Israr Ahmed},
  title = {The Efficiency of Exchange Rate Market: A Case Study on Pakistan},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {3},
  number = {2},
  pages = {125-137},
  doi = {10.11648/j.ijefm.20150302.17},
  url = {https://doi.org/10.11648/j.ijefm.20150302.17},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20150302.17},
  abstract = {This study investigates the efficiency of foreign exchange market in Pakistan. Based on monthly data during the period of July 2000 to October 2012 for 13 currencies against the Pak Rupee, three techniques of regression analysis are applied. The result of regression on trended data portrayed that unbiased hypothesis does not hold in the exchange rate market owing to serial correlation and non-stationary time-series data. The regression analysis with de-trended data remarked exchange rate market of Pakistan is neither efficient nor speculative. The findings of regression analysis with orthogonality experiment explored incidence of bandwagon behavior in selected currencies. The results of this study suggested that concerned authorities should reinforce information dissemination procedure and regulate unofficial currency markets activities for maintaining the efficiency of foreign exchange market in Pakistan.},
 year = {2015}
}

Copy | Download

TY  - JOUR
T1  - The Efficiency of Exchange Rate Market: A Case Study on Pakistan
AU  - Zobia Israr Ahmed
Y1  - 2015/03/18
PY  - 2015
N1  - https://doi.org/10.11648/j.ijefm.20150302.17
DO  - 10.11648/j.ijefm.20150302.17
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 125
EP  - 137
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20150302.17
AB  - This study investigates the efficiency of foreign exchange market in Pakistan. Based on monthly data during the period of July 2000 to October 2012 for 13 currencies against the Pak Rupee, three techniques of regression analysis are applied. The result of regression on trended data portrayed that unbiased hypothesis does not hold in the exchange rate market owing to serial correlation and non-stationary time-series data. The regression analysis with de-trended data remarked exchange rate market of Pakistan is neither efficient nor speculative. The findings of regression analysis with orthogonality experiment explored incidence of bandwagon behavior in selected currencies. The results of this study suggested that concerned authorities should reinforce information dissemination procedure and regulate unofficial currency markets activities for maintaining the efficiency of foreign exchange market in Pakistan.
VL  - 3
IS  - 2
ER  -

Copy | Download