The Investigation of Time Varying Efficiency in Financial Markets of Iran: Case Study of Foreign Exchange and Gold Markets

Document Type : Research Paper


1 Ph.D. Candidate, Department of Economics, Institute for Management and Planning Studies, Tehran, Iran.

2 Assistant Prof., Department of Economics, Urmia University, Urmia, Iran.


Objective: The Efficient Market Hypothesis is one of the cornerstones of modern financial economics. It’s also an important topic for investors in terms of making extra profit. In this way, the main objective of this study is to test the weak form of market efficiency in Iran foreign exchange and gold markets using monthly data during 1980M04-2018M09 and 1985M04-2018M09 respectively for foreign exchange market and gold market.
Methods: Due to inability of linear models in capturing structural breaks and nonlinearities in financial time series, in this paper, for testing the efficiency in foreign exchange and gold markets the Markov Switching Unit Root method has been used.
Results: The result of the linear unit root test show that both the foreign exchange and gold markets are efficient; But the results of the Markov Switching unit root test is slightly different and show that market efficiency has a time varying nature. Results also show that the main source of market inefficiency is the government’s interference in the market.
Conclusion: Results of this research show that the linear unit root tests which have been used so far in literature for testing the weak form of efficiency in asset markets suffer from the lack of power for testing EMH. The reason is straightforward, since most financial time series are nonlinear in nature, therefore modelling such time series with linear methods inevitably will result in biased results.


Main Subjects

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