TESTING EFFICIENCY OF GEORGIAN LARI US DOLLAR EXCHANGE MARKET

Abstract

Georgian business and academic circles time and again debate whether the exchange rate for the national currency, Lari (GEL), is determined by a free and efficient market or can be predicted and/or manipulated. This paper attempts to resolve that debate. It addresses whether the GEL/US$ exchange market is weak form efficient, i.e., are GEL/US$ daily fluctuations truly independent from its past values? In order to test the efficiency of the market we analyzed daily GEL/US$ rates for years 2001 to 2017. The results of statistical tests are mixed. We conclude that in 2006 and for the period 2009-2017 the exchange market is weak form efficient with exception of December 2014. The market was inefficient in other years, in particular in 2007 and 2008. This paper identifies global as well as local reasons which might be the cause of this inefficiency. For 2007 and 2008 the main reasons were (1) irrational market growth globally followed by the financial crisis and (2) an attempt of Georgian ruling elite to create an appearance of solidification of economy. Other reasons were imperfect rules for determining the official exchange rate (revised in 2009) and the absence of transparent interbank trading platform, again before 2009.