Definition and Types of Foreign Exchange Market Efficiency (Foreign Exchange)

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The definition of Market Efficiency

Tucker (1991:46) used the term efficiency in the financial markets include allocative efficiency, operational efficiency, and pricing efficiency. Allocative efficiency (allocational efficiency) is the allocation of resources that have to be in optimal conditions, and further changes in the allocation of these resources will not improve the welfare of economic agents. Operational efficiency (operational effiency) emphasized that the efficiency is achieved when the transaction is done with minimum transaction costs. Efficiency pricing (pricing efficiency) of whether the price of an asset equal to the intrinsic economic value. Efficiency of information (informational efficiency) is dependent on the efficiency of information for processing speed and accuracy of the information to be submitted.

According to Samuelson and Nordhaus (1985) efficient market is defined as a market where all information can be quickly understood by all market participants and reflected in market price formation. If an efficient market, the current price of an asset will reflect all available information in line with the formation of asset prices. Kuncoro (1996:98) an efficient market where investors are said to effectively use the information for profit. The opportunities to profit, investors compare actual prices with prices ekulibriumnya assets calculated using generally available information. If the actual asset prices distorted equilibrium prices, investors quickly and process information and perform transactions it deems appropriate. Due to the profit motive, the actual asset prices adjust so that the equilibrium price is reached.

According to Fama (1965) describe an efficient market consists of a number of actors are always rational, and active pursuit of maximum profit, competing with each other in predicting the market value of the securities in the future, and where important current information is almost freely available for all market participants. In other words if the price of the asset allocation of resources the sign, then the price has to process and transfer all relevant information regarding future developments in the market for suppliers and requesting the asset. Therefore, the market is said to be efficient if the market price really quickly reflect all relevant information. Technically it is said that the conditions of efficiency, the expected value of excess earnings equal to zero.

Test this proposition is the same as observing whether investors efficiently install the actual profit is equivalent to equilibrium values. In the empirical test is needed to understand how expectations were formed. A rational expectations means there are no systematic errors in forecasting. The implications of price changes should be random (random) in the sense that such changes can not be predicted based on the reality of the past.

The Fei Ming (2001: 36-37) said the foreign exchange market efficiency is defined as a situation where the price of traded reflects a situation where prices reflect the overall trading of the relevant information. Therefore, current prices already reflect the information data in the past, then the price change will not form a specific pattern but follows the pattern of random walk. Random walk pattern is the change in value that is independent, which in the past price changes can not be used to predict future price changes.

This type of Forex Market Efficiency

Fama (1965) explains that there are three types of market efficiency in general:

a. Weak form (weakly Efficient Market)

Weak form (weakly Efficient Market) where the price has now entered all the information of trade and prices in the past. This means that the current spot rate is the best predictor for future spot rate.

b. Semi-strong form of (Semi-Strong Efficient Market)

Semi-strong form of (Semi-Strong Efficient Market) where the information is reflected in the foreign exchange spot rate is more than just history, but also reflect all publicly available information

c. Strong form (Strongly Efficient Market)

Strong form (Strongly Efficient Market) where prices reflect all information that may all be known. Therefore, for investment analysts and other insiders may earn an average profit consistently. Nevertheless, the strong form of market efficiency hypothesis may not be maintained because of central bank intervention in the forex market.