TITLE:
Testing the Efficient Market Hypothesis in an Emerging Market: Evidence from Forex Market in Mauritius
AUTHORS:
Lydie Myriam Marcelle Amelot, Subadar Agathee Ushad, Matthew Lamport
KEYWORDS:
Efficient Market Hypothesis, Forex Market, Stock Exchange of Mauritius, Emerging Markets
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.7,
December
12,
2017
ABSTRACT: The present study
investigates the efficiency of the forex market based on the theory of the
Efficient Market Hypothesis in Mauritius, a well-diversified and emerging
economy in the African region. Hence, this study considers the case of
Mauritian forex market nominal spot rate daily data namely EUR/MUR, USD/ MUR,
GBP/ MUR and JPY/ MUR over a time period of 5 years ranging from 2012 to 2016.
The technique used for analysis is firstly concentrated on the use of Augmented-Dickey
Fuller (ADF) and Philips Peron (PP) unit root to test the weak-form of
efficiency and secondly, the Johansen Cointegration Test, the Granger Causality
Test and Variance Decomposition are utilized to examine the existence of semi-strong
form efficiency in the Mauritian foreign exchange market. Results indicated
that the unit root test tested by ADF and PP unit root test support the weak
form market as it follows a random walk process. Secondly, the Johansen
Cointegration test reveals that there is no long run relationships among
foreign exchange variables. However, the Granger causality test confirmed the
existence of unidirectional and bidirectional relationships among the various
exchange rates. Moreover, the Variance Decomposition confirmed the presence of
long run co-movements among the exchange rates. Therefore, both tests fail to
support the semi-strong form market. This means that one exchange rate can
predict one or more exchange rates which is against the semi-strong form market
hypothesis. Therefore, it is deduced that the foreign market is efficient in
the weak-form but is inefficient in the semi-strong form in Mauritius.