A study on the risks and efficiency of the forex market based on the detrended fluctuation analysis

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Abstract

Exchange rate fluctuations profoundly impact macroeconomic variables, making them a focal point for policymakers. This study is grounded in the efficient market hypothesis (EMH), asserting that such forecasts offer no utility due to all relevant information being embedded in asset prices. The research problem is rooted in the dynamics of currency exchange rate fluctuations and their impact on the Albanian economy. The research aims to analyse Albanian lek (ALL)/euro (EUR) exchange rate dynamics and their impact on Albania’s economy, assessing market efficiency and providing insights for monetary and fiscal policy design. The method used is a detrended fluctuation analysis (DFA) which consists of a root mean square analysis of a random walking pattern (Peng et al., 1994). This method is used to assess adherence to the weak form of EMH. Findings indicate that the Albanian foreign exchange market closely resembles a random walk, suggesting efficiency during specific periods. The study underscores the exchange rate’s dual impact: its influence on domestic price levels and its broader implications for the real economy and balance of payments. This paper is relevant as it offers crucial insights into currency exchange rate dynamics and their economic impacts, supporting policymakers in improving Albania’s economic stability and market efficiency.

Keywords: Efficient Market Hypothesis, Foreign Exchange Market, DFA, Random Walk

Authors’ individual contribution: Conceptualization — E.S. and B.Ç.; Methodology — B.Ç.; Investigation — E.S. and B.Ç.; Resources — E.S. and B.Ç.; Writing — E.S., B.Ç., and B.D.; Writing — Review & Editing — B.D.; Supervision — E.S.; Funding Acquisition — B.D.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: E00, F49, G40

Received: 18.04.2024
Accepted: 18.10.2024
Published online: 22.10.2024

How to cite this paper: Shehu, E., Çupi, B., & Duraj, B. (2024). A study on the risks and efficiency of the forex market based on the detrended fluctuation analysis. Risk Governance and Control: Financial Markets & Institutions, 14(4), 59–67. https://doi.org/10.22495/rgcv14i4p6