IIARD International Institute of Academic Research and Development

WORLD JOURNAL OF FINANCE AND INVESTMENT RESEARCH (WJFIR )

E-ISSN 2550-7125
P-ISSN 2682-5902
VOL. 8 NO. 5 2024
DOI: 10.56201/wjfir.v8.no5.2024.pg31.43

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Unveiling Adaptive Market Hypothesis: A Test of Price Bubbles in Nigeria’s Foreign Exchange Market

Ejem, Chukwu Agwu

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Abstract

This study examined the Adaptive Market Hypothesis in the context of the Nigerian Foreign Exchange (FOREX) market and investigated the presence of price bubbles using the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. The Adaptive Market Hypothesis suggests that market efficiency is not static but evolves over time in response to changing market conditions, investor behaviour, and economic fundamentals. The data used for this study comprised of daily, weekly and monthly exchange rates spanning from February 26, 2018 to July 26, 2024 obtained from Central Bank of Nigerian (CBN) publications. To test this hypothesis, we analyze the exchange rate data of the Nigerian Naira (NGN) against the US Dollar (USD) over an extended period. The EGARCH model is employed to capture the volatility dynamics and asymmetric effects that characterize financial markets, particularly in emerging economies. The study found evidence of volatility clustering and asymmetric volatility responses to market shocks, indicating periods of heightened market instability and potential price bubbles. These findings suggested that the Nigerian FOREX market exhibits time-varying efficiency, consistent with the principles of the Adaptive Market Hypothesis. The results provided valuable insights into the market's behaviour and dynamics, highlighting the importance of adaptive strategies for market participants and policymakers in managing risks associated with foreign exchange volatility. The study contributes to the growing literature on market efficiency and the application of advanced econometric models in emerging markets.

keywords:

Adaptive Market Hypothesis, EGARCH model, Nigerian FOREX market, price

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