Foreign exchange market efficiency and structural instability: Evidence from Taiwan

This paper investigates the hypothesis of market efficiency in Taiwan's foreign exchange market using the method of Gregory and Hansen (1906), which allows for a one-time break in the linear long-run relationship between spot and forward exchange rates. In addition, die method of dynamic ordinary least square provided by Stock and Watson (1993) is applied to examine the significance of cointegrating coefficients. We conclude that the structural instability in the cointegrating vector results in the rejection of market efficiency.