Determination of efficient market hypothesis in exchange market in terms of behavioral finance

According to the efficient market hypothesis, rational individuals take account of all the available information and ensure that all information is reflected in prices, and there is no systematic error in the market. The validity of this hypothesis requires the assumptions that individuals behave rationally, and arbitrage opportunities exist in the market. However, results contrary to these assumptions have been detected in observation and application studies conducted over the years. Determining the extent to which individuals' behavior differs from these behaviors assumed in the traditional economic model is within the subject of behavioral economics. In general, behavioral economics can be defined as an approach that suggests that economic models are better explained when some economic units are not rational. In other words, behavioral economics examines the behavior of individuals when one or both assumptions of rationality are invalid. Behavioral finance models state that individuals can show irrational behaviors and make repeated mistakes in the decision-making process. In this study, the efficiency of Turkish foreign exchange market in a weak form and semi-strong form is tested using daily spot and forward exchange rates of Euro and US Dollar. Firstly, in order to test the efficiency in weak form, the Augmented Dickey Fuller (ADF) and Philips Perron (PP) unit root tests and Zivot Andrews structural break unit root test are used. At this point, it is determined that there is a structural break in the time series. Secondly, the Engle-Granger cointegration method is used to test whether there is a long-term relationship (cointegration relationship) between the dollar spot rate and the dollar forward rate and the Euro spot rate and the Euro forward rate. Then, the findings are evaluated by estimating the cointegration coefficients with the LSC (Least Squares) and FMOLS (Fully Modified Least Squares) methods.