An investigation of Forex market efficiency based on detrended fluctuation analysis: A case study for Iran

Esmaiel Abounoori, Mahdi Shahrazi and Saeed Rasekhi

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 11, 3170-3179

Abstract: The efficient market hypothesis (EMH) states that asset prices fully reflect all available information. As a result, speculators cannot predict the future behavior of asset prices and earn excess profits at least after adjusting for risk. Although initial tests of the EMH were performed on stock market data, the EMH was soon applied to other markets including foreign exchange (FX). This study uses the detrended fluctuation analysis (DFA) technique to test 01:12:2005–18:04:2010 Iranian Rial/US Dollar exchange rate time series data to see if it can be explained by the weak form of the EMH. Moreover, to determine changes in the degree of inefficiency over time, the whole period has been divided into four subperiods. The study shows that the Iranian Forex market (the Rial/Dollar case) is weak-form inefficient over the whole period and in each of the subperiods. However, the degree of inefficiency is not constant over time. The findings suggest that profitable risk-adjusted trades could be made using past data.

Keywords: Efficient market hypothesis (EMH); Forex market; Rial–Dollar exchange rates; Detrended fluctuation analysis (DFA); Iran (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:11:p:3170-3179

DOI: 10.1016/j.physa.2011.12.045

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