International parity conditions and market efficiency in emerging markets

The validity of international parity conditions in fifteen developing market economies was tested in current study by four separate models. These were the real exchange rate model, the purchasing power parity model, the interest rate parity model, and the market effectiveness hypothesis model. Traditional and structural breakpoint unit root tests were used for real exchange rate model; time series and panel data analysis were used for purchasing power parity and interest rate parity models; and finally time series analysis was used for market effectiveness hypothesis. Quarterly data from the first quarter of 2003 to the fourth quarter of 2015 and yearly data covering from 2003 to 2005 were considered in the study. Findings from the current study showed us that international parity conditions generally were not valid in the fifteen developing economies for the studied terms. The effectiveness of purchasing power parity, showing the relations between prices and exchange rates and explaining commodity market conditions, is totally avoidable in those economies studied. The interest rate parity model gave us more consistent results comparing all other three models. The conclusion we came at our current study was as follows: Price and interest rate levels are not effective enough to develop the levels of future exchange rates in domestic markets. Especially negative changes caused by global finance markets on the developing market economies were the most important reasons for the decrease in the capacity in forecasting the exchange rates in the future.