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Testing the hypothesis of market efficiency in the Taiwan-US forward exchange market since 1990

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This article examines the applicability of the hypothesis of market efficiency in Taiwan's foreign exchange market using daily data. Instead of linear regression-based models, we consider the possibility that the true data generating process may come from two different distributions, and we employ the Markov Switching approach to analyse this. From the results of the two-state Markov Switching model, we define State 1 as the efficient state and State 2 as the inefficient one. Only the 30-day forward rate is able to differentiate between the two states. Based on the unconditional probabilities from the Markov switching model, we also find that the 30-day forward rate has a 70% probability in the efficient state, which indicates that 70% of all speculators fully extract information when predicting future spot rates, while 30% of all investors do not.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840701579200

Affiliations: Department of Finance, Dayeh University, Changhua 51591, Taiwan

Publication date: January 1, 2010

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