Empirical studies of Nigeria's foreign exchange parallel market II: Speculative efficiency and noisy trading

Melvin Ayogu

Working Papers from African Economic Research Consortium

Abstract: Previous studies on the Nigerian parallel market found "return predictability". Based on this finding, we quantify, using Hansen's GMM estimation technique, the risk-return characteristics implicit in the simplest trading strategy of "buy and hold" an optimal portfolio of currencies. The risk-return profile suggests that profitable trading opportunities found in the Nigerian market may not indeed be exploitable. Also, we reexamine the evidence on the presence of destabilizing activities in the Nigerian parallel market. Using the noise-trader approach, we find no significant evidence of bandwagon expectations that may drive prices gradually away from fundamentals. The overall implication of our findings is clear. If the emerging characteristics of the new autonomous market are similar to the parallel market that it seeks to absorb, then an activist intervention policy, based mainly on market-stability imperatives, should be resisted strongly.

Date: 1997-11
Note: African Economic Research Consortium
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