Efficiency of New Zealand’s Spot FOREX Market after twenty four years of float

Abstract

Government growth policies in the Asia-Pacific region throughout the 1980s involved a considerable amount of financial market liberalisation, which was intended to increase the efficiency of financial markets. The rationale for a freely floating currency rests heavily on the idea that an unregulated market will on average produce more appropriate (in an economic sense) exchange rates than a market managed by government officials. With this in mind, the New Zealand Government floated the New Zealand dollar in March of 1985. The purpose of this paper is to investigate the efficiency of the New Zealand spot FOREX market after the float, using both univariate and multivariate testing procedures. The data employed to obtain these results has a 14 year delay between the floating of the New Zealand dollar and the start of the sample allowing market participants to become more experienced and sophisticated in their dealings with the floated currency. This has allowed for the production of results that truly reflect the influence of the float on the efficiency of New Zealand’s spot FOREX market. The results of these tests confirm the notion of informational market efficiency within New Zealand’s spot FOREX market. These robust results provide strong support for market liberalisation in New Zealand, as efficiency has been achieved.