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An empirical study of the interrelationships, integration, and the efficiency of stock and foreign exchange markets in Fiji

Paul, Thomas M. and Uriam, Timiti (2014) An empirical study of the interrelationships, integration, and the efficiency of stock and foreign exchange markets in Fiji. Journal Of Quantitative Economics -Journal of the Econometric Society of India-, 12 (1). pp. 156-168. ISSN 0971-1554

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This article attempts to examine the integration and efficiency of the pacific country Fiji’s stock and foreign exchange markets. The study employed, Unit Root test, Cointegration and Error correction models, and the VEC Grangers causality test, using the daily data of FJ$/USD $, and Fiji’s market capitalization index (stock market), from 3rd August 2010 to 10th July 2012. The level form data follows the unit root time series process , and the difference form, and return form data follow stationary process .This broadly supports the ‘weak form efficient market’ hypothesis. However, the market capitalization index, and FJ$/US$ rates are cointegrated. The cointegrating coefficient of the FJ dollar is positively related to the market capitalization index, and therefore, the FJ dollar appreciation stimulates the Fiji market capitalization index. This is perhaps the first scientific research which shows that for the small open Pacific economy of Fiji, a strong currency supports the stock market by encouraging a low inflation environment and therefore there may be some merit in the argument for aligning to strong neighboring currency of Australian dollar. The changes in the market capitalization index is related to the long run trend factors in FJ dollar index as revealed in the error correction model. The return data of FJ dollar, do not Granger cause the return data of the Fiji stock market return in the short run with out an error correcting factor equation and vice versa as well. This supports the semi strong form of efficient market hypothesis, though more studies on markets integration are recommended by us, and we recommend more policy intervention to create more liquidity and depth in Fiji stock markets.

Item Type: Journal Article
Uncontrolled Keywords: Efficient market hypothesis, stock return, exchange rate return, Buy-Hold strategy, Cointegration and Vector Error Correction Model, Granger’s causality test, Normal Distribution , Leptokurtic, strong currency. JEL Classifications: G15, C32, G14, F31
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Business and Economics (FBE) > School of Accounting and Finance
Depositing User: Thomas Paul
Date Deposited: 10 Aug 2014 23:55
Last Modified: 12 May 2016 23:07

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