The Test For Weak Form Efficient Market Hypothesis

On December 1st,2015,the IMF(International Monetary Fund)officially announced that the RMB will be included in the SDR(Special Drawing Rights)on October 1 st,2016,marking a milestone in the process of the internationalization of RMB in China.With RMB going to the world and being increasingly included in the currency list of foreign exchange reserves,the global foreign exchange market for RMB has also put forward higher requirements.This paper examines the market effectiveness of the foreign exchange markets among various countries around the world,and verifies whether the Weak Form Efficient Market Hypothesis(EMH)is established in each foreign exchange market,so as to determine whether the current global foreign exchange market satisfies the weak form EMH.Weak form EMH is one of the important theoretical foundations in behavioral finance theory.This paper describes three forms of EMH:weak EMH,semi-strong EMH,and strong EMH.In the foreign exchange market,there are a large number of technical analysis methods,such as morphological analysis,Bollinger analysis,trend lines,etc.;under the condition that the weak EMH is established,these technical analysis methods will all fail;thus whether the foreign exchange market is weak EMH is of great significance for investors to adopt decisions in the foreign exchange market.Therefore,it can be said that the weak EMH is the most closely related to foreign exchange investors and has the most significant impact on the foreign exchange market.Therefore,this paper quantifies the weak EMH and establishes an econometric model.The effectiveness of the current foreign exchange market is verified from three perspectives.Based on the research results,the reasons for the failure of the market to satisfy the weak EMH are analyzed.Finally,related policy recommendations were put forward regarding the internationalization of RMB and the steady development of China's foreign exchange market.After collating previous representative research literatures,this paper finds that most of the verifications of the EMH remain in the stock market and the foreign exchange market of a single country.However,there is a relative lack of research on the weak validity of the entire international market;This paper,using the monthly data of spot exchange rate and forward exchange rate as a research variable,verifies and analyzes whether the 24 foreign exchange markets in the world satisfy the weak EMH.This paper selects the random walk model,the rational expectation model and the sequence unrelated model,and validates the weak efficient market hypothesis from three aspects.The three models complement each other and extend each other.And through the structural breakpoint test,it was found that the weak effectiveness of some foreign exchange markets changed around a certain point in time;mainly before and after the 2008 financial crisis,the market showed different market effectiveness.The study found that the foreign exchange market between China and other countries basically satisfies the weak EMH;the weak effectiveness of the foreign exchange market between China and the UK was affected by the 2008 financial crisis,before the financial crisis.The foreign exchange market between China and the United Kingdom is weak effective,but after the financial crisis of 2008,the weak EMH is no longer applicable in the foreign exchange market between China and the UK.Finally,a comparative analysis of the effectiveness of China's foreign exchange market and foreign exchange markets in other developed countries,and providing relevant policy recommendations for improving the Chinese foreign exchange market and promoting the internationalization of the RMB.