An Investigation of Foreign Exchange Market Efficiency

In this paper, we investigate the market efficiency and scaling dynamics of foreign exchange market efficiency. The daily exchange rate return series of the four countries of South Asia, namely Bangladesh, India, Pakistan and Sri Lanka are used. We used the Multifractal Detrended Fluctuation Analysis (MFDFA) to examine the non-linear dynamics of the FX market. MFDFA can investigate non-linear trends , market anomalies, and heterogeneous patterns in asset prices. Our findings suggest the departure from the traditional framework of Efficient Market Hypothesis (EMH). The empirical findings from the four markets are contrary to the weak-form random walk theory. In this regard, it indicates that the foreign exchange rate's volatility is anti persistent in nature and hold mean reverting price dynamics. Moreover, comparative analysis shows a distinct regional hierarchy of nonlinear market complexity. Bangladesh currency market exhibits a higher degree of inefficiency and spectrum width. Credit control and foreign exchange rationing is the reason for the highest degree in Bangladesh. The multifractal spectrum for Sri Lanka is very steep and there is a very steep singularity expansion at the end. It implies that the localized dynamics of the jumps are related to structural regime change and the sovereign debt crisis in Sri Lanka. The results of India demonstrate superior power law and managed scaling complexity. The compressed singularity spectrum for Pakistan is a policy induced phenomenon, which has been brought about by the price control by the central bank. The overall results of this study indicate that the adaptive market hypothesis is valid. So, discretionary interventions and liquidity constraints throw off the natural balance from the market.