Efficient or adaptive? Evidence from Indonesian forex market

We test the possible presence of weak-form informational efficiency in the Indonesian forex (FX) market using daily bilateral exchange rate return of Indonesian Rupiah against U.S. Dollar from January 24, 2001 to March 29, 2019. First, we employ a battery of statistical tests including variance ratio tests, tests for linear dependence and Hurst coefficient on the full dataset as well as on four non-overlapping sub-samples of equal length. The tests provide a mixed result, whereas Hurst coefficient values identify long-run persistence in the market. Based on this evidence, we test the possibility of adaptive nature of Indonesian FX market. The adaptive market hypothesis is tested using the newly proposed adaptive index (Al) in order to quantify the degree of information inefficiency in the Indonesian FX market at any given point. The Al values conclusively prove that Indonesian FX market is adaptive and periodically switches between states of efficiency and inefficiency. Moreover, various macroeconomic and financial events influencing Indonesian FX market efficiency are identified.