FOREX MARKET WEAK FORM EFFICIENCY AND SEASONALITY: EVIDENCE FROM INDIA

Abstract

In India, market efficiency theories are widely studied in the stock market and less widely researched market is the foreign exchange (forex) market. The Indian forex market has undergone many changes like FEMA 1999, formation of CCIL in 2001, current account
convertibility, liberalisation of capital account. In this study, we test the random walk hypothesis for a period of five years from 01-04-2009 to 31-03-2014 taking the daily RBI reference rates of INR/USD. We use regression technique, normality test, autocorrelation,
ADF test, PP test and Run test and more significantly Variance ratio test. Further, we use AR (p) model to examine the presence of day of the week effect in the Indian forex market. Based on the results of the above tests, we conclude that forex market is weak form
inefficient in the short run and weak form efficient in the long run. We also conclude that there is Tuesday and Thursday effect in the forex market. The findings of this paper indicate the signs of market inefficiency even in the weak form. Therefore, regulators need to take note of these findings and initiate policy measures to eliminate day of the week effect.