Cesar C. Rufino
De La Salle University, Manila, Philippines

Year: January 2014
Volume: 23 No. 2
Pages: 65-79


The martingale properties of the floating exchange rates of the ASEAN+3 region are analyzed in this study using contemporary (2000 to 2012) weekly data of inter-bank call rates. The main goal of the analysis is to see if informational efficiency is a feature floating (managed or independently floating) currencies in this coalition of countries still possess despite the current credit crisis and other economic shocks during the period. Employing relevant state-of-the-art econometric techniques, the study sets to empirically determine the presence of two important ingredients of informationally efficient market—the existence of the unit root component and the presence of uncorrelated increments within each exchange rate series. To address the unit root problem, a battery of tests catering to heterogeneous panel data is used while variance ratio tests robust to the occurrence of conditional volatilities are implemented.
While the stylized facts and simple correlation analysis of the currencies and their one week holding period returns give initial evidence of market efficiencies, the various analytical tests and procedures implemented in the study provide compelling evidence on the existence of martingale properties of the FX series. Both the panel unit root and variance ratio tests uphold the validity of the efficient market hypothesis (EMH) in the participating currencies. The implication of this result is that despite the occurrence of perturbations due to economic shocks (e.g. the current credit crisis) the currencies of the region, which are currently pursuing unification, are riding the crises and exhibit informational efficiency. This may be considered a testament to the success of the on-going interregional monetary coordination and other multilateral initiatives of countries within the region aimed at crisis prevention and monetary policy synchronization.