Examining the efficiency of the foreign exchange in Namibia
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Date
2015
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Publisher
University of Namibia
Abstract
This paper examines the weak and semi-strong form of the efficient market hypothesis in the Namibian foreign exchange market using sample data from the period January 1993 to December 2011. The study uses monthly nominal spot exchange rates for the British Pound (GBP), the United States Dollar (USD) and the European Currency Unit (EURO). The weak form is examined using the unit root tests, namely: the Augmented Dickey Fuller (ADF), the Philips-Perron (PP) and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS); while the semi-strong form is tested using the Johansen Co-integration Test, Granger Causality Test and the Variance Decomposition Analysis. The results indicate that the variables are stationary at first differencing, implying that the Namibian foreign exchange market is informational efficient, that is, the exchange rates exhibit random walks and are consistent with the weak form of the Efficient Market Hypothesis (EMH). In other words, past exchange rates cannot be used to predict future exchange rates. In addition, the results also show that one currency cannot, to a certain degree, be used to predict another, which implies that the Namibian foreign exchange market is consistent with the semi-strong form EMH. These results are quite interesting, especially for a small open Sub-Saharan African economy such as Namibia‟s. Such countries are often associated with shallow and underdeveloped financial markets typified by absence of forward markets, and low levels of foreign exchange reserves. Moreover, these results have important implications for government policy makers and market participants in the foreign exchange market of Namibia. An efficient market needs minimal intervention given that its participants cannot make abnormal gains from foreign exchange transactions.
Description
A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Science in Economics
Keywords
Foreign exchange market