A Test of the Efficiency of the Foreign Exchange Market in Indonesia

We test whether the Indonesian foreign exchange market is efficient. Since empiricalevidence has been inconclusive, we employ a new generalized autoregressiveconditional heteroskedasticity–based unit root test to examine the Efficient MarketHypothesis (EMH). The advantages of this model are that it accommodates twoendogenous structural breaks and heteroskedasticity. Tests that account for structuralbreaks reject the EMH in only 29% of cases. When we accommodate both structuralbreaks and heteroskedasticity, we find the EMH is rejected in 50% of cases. Finally, weexamine the half-life of exchange rates and find that 71% of rates revert to equilibriumwithin a month.