Discussiones Mathematicae Probability and Statistics 22(1,2) (2002) 27-35

MARKET EFFICIENCY AND NON-LINEAR DEPENDENCE IN THE CZECH CROWN/US DOLLAR FOREIGN EXCHANGE MARKET

David Chappell

Department of Economics University of Sheffield
9 Mappin Street, Sheffield S1 4DT
e-mail: d.chappell@sheffield.ac.uk

Robert M. Eldridge

School of Business
Southern Connecticut State University
501 Crescent Street, New Haven CT 06515, USA

Abstract

We examine the Czech Crown/US Dollar exchange rate for evidence of market efficiency during the period May, 1997, to September, 1998. The Czech Crown was floated on the world's foreign exchange markets in May, 1997, and it is of interest to examine the behaviour of this new market. We show that this foreign exchange market satisfied the criteria for weak form efficiency during the first part of the period under investigation but there is evidence of non-linear dependence during the second part of the period. This is successfully modelled using a GARCH-M(1,1) representation.

Keywords: foreign exchange markets, market efficiency, time series analysis, GARCH models.

2000 Mathematics Subject Classification: 06P20, 91B84.

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Received 25 March 2002