Efficiency Of Foreign Exchange Markets: A Developing Country Perspective

This study tests weak and semi-strong form efficiency of the foreign exchange market in Sri Lanka during the recent float using six bilateral exchange rates. Weak-form efficiency is examined using unit root tests while semi-strong form efficiency is tested using co-integration, Granger causality tests and variance decomposition analysis. Results indicate that the Sri Lankan foreign exchange market is consistent with the weak-form of the Efficient Market Hypothesis. However, the results provide evidence against the semi- strong version of the Efficient Market hypothesis. These results have important implications for government policy makers and participants in the foreign exchange market of Sri Lanka.