China's Foreign Exchange Market Efficiency

Since the breakdown of the Bretton Woods system of fixed exchange rates in 1973, exchange rates between major currencies have displayed large fluctuations. This turbulence of foreign exchange rates is an important concern of government policy and its explanation is a challenge for theories of foreign exchange market behavior. And this turbulence character of exchange rates is similar with that of stock prices, which suggest that we should study exchange rate like other assets such as stock. If we study foreign exchange markets as asset markets, there is the narrower technical question of "market efficiency" (Frenkel, 1980).The whole dissertation is organized as follows:The first chapter is definition of some important concepts, together with the development of theory of market efficiency.Chapter two presents an introduction to our exchange rate system of RMB, and points the way of the development of the system.Chapter three tests the informationally efficiency of China foreign exchange market with different way such as unit root test, filter ruler test and R/S analysis. Our conclusion is the rate of RMB to USD is not random walk, and which means that our exchange market is information efficient. But after the R/S analysis test we found the noise of our exchange market is too small which means that market isn't efficient according to the behavioral finance theory. Then we present reasons.Chapter four tests the operationally efficiency of our exchange market in the way of contrasting trade cost. We found the unit cost of little amount trade of our market is lower, but the unit cost of big amount is higher than that of American and European market. So only according to the trade cost, we can't say our exchange market are operational efficient or not. Then we test the allocatively efficiency of our exchange market in the way of testing the Co-Integration between our international trade and the rate of RMB to some main currencies. Our conclusion is there isn't long run equilibrium between above two sequences, which means our exchange market isn't allocatively efficient.At last we present the conclusion of this paper: our foreign exchange market isn't efficient in all three aspects. At same time, we present our policy proposes.Keywords:China exchange market;Informationally efficiency;Operationally efficiency;Allocatively efficiency...