Efficiency of Foreign Exchange Market in Taiwan: An Application of the Profitability Tests

• Main Authors: Po-Yuan Wang, 王柏元
• Other Authors: Chien-Fu Lin
• Format: Others
• Language: zh-TW
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/95406903264857234967

碩士 === 國立臺灣大學 === 經濟學研究所 === 101 === This paper uses exchange rates of the U.S. dollar (USD)、 Japanese yen (JPY)、British pound (GBP)、Swiss franc (SFr)、Australian dollar (AUD) and Canadian dollar (CAD), relative to new Taiwan dollar (NTD), to test the efficient market hypothesis. The period of study is from April 1989 to August 2012 (NTD-CAD rate is from May 1990 to August 2012 due to data limitations). Traditional approach to testing the uncovered interest rate parity (UIP) by ordinary least squares (OLS) regression could result in omitted variable bias because of the significant differences in volatility between the change in the log of the exchange rates and the change in the interest rates. Besides, the controversy of the OLS regression model also arises from the low power of the unit root tests to the change in the interest rates. In addition to considering the traditional UIP OLS regression model, we examine the deviation from UIP (DUIP) in the view of mean stationary, which serves as the robust test of the traditional UIP OLS regression model. The results show that both in the traditional UIP OLS model and in the DUIP model, the six currencies studied do not reject the efficient market hypothesis. Moreover, different from the traditional UIP OLS regression model, we propose five intuitional profitability tests from the arbitrage strategies in foreign exchange markets to detect the efficient market hypothesis from the perspective of excess return. From the profitability tests results, we find investors can not receive the excess return in the foreign exchange markets of NTD against JPY、 GBP、 SFr and CAD. However, there exists the room for arbitrage in the foreign exchange markets of NTD against USD and AUD.