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Speed of adjustment within currency markets

journal contribution
posted on 2007-11-01, 00:00 authored by Terry Boulter
One measure of market efficiency is the speed at which prices adjust to fundamental value with the arrival of information. This paper examines this issue by estimating speed of adjustment coefficients using three  methodologies for eight currencies for the entire year of 1996 using half hourly non-overlapping return intervals. We find that the bulk of adjustment to fundamental value for all currencies occurs within the hour but then quickly deteriorates. Within the hour adjustment is sufficiently quick to be considered efficient but the lack of full adjustment to fundamental value is not what would be predicted within an efficient market. There is no evidence for any of the currencies studied of a tendency to over react. There is also little difference in the speeds of adjustment between actively and less actively traded  currencies. There is however a definite difference in the speed at which currencies adjustment depending on whether they are free floating or managed exchange rates. Free floating rates adjust much quicker. Government intervention slows adjustment to fundamental value.

History

Journal

International review of business research papers

Volume

3

Issue

5

Pagination

88 - 122

Publisher

World Business Institute

Location

Melbourne, Vic.

ISSN

1837-5685

eISSN

1832-9543

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2007, World Business Institute

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