2014•The Lahore journal of economicsOpen access

The Efficiency of Foreign Exchange Markets in Pakistan: An Empirical Analysis

Rizwana Bashir, Rabia Shakir, Badar Ashfaq, Atif Hassan

Abstract

This study investigates the empirical relationship between spot and forward exchange rate efficiency with reference to Pakistan and the efficiency of its foreign exchange market. We use monthly data from the State Bank of Pakistan and KIBOR rates for the period July 2006 to December 2013. Our results indicate that the forward exchange rate does not fully reflect all the information available. Market players may gain the benefits of volatility speculation due to market inefficiency. Pakistan’s foreign exchange market is still small compared to those of other emerging economies, implying that substantial policy work is required.

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Key concepts: Foreign exchange market, Speculation, Inefficiency, Economics, Volatility (finance), Exchange rate, Interest rate parity, Foreign exchange