An Empirical Study of the Interrelationships, Integration, and the Efficiency of Stock and Foreign Exchange Markets in Fiji

This article attempts to examine the integration and efficiency of the pacific country Fiji's stock and foreign exchange markets. The study employed, Unit Root test, Cointegration and Error correction models, and the VEC Grangers causality test, using the daily data of FJ$/US$, and Fiji's market capitalization index (stock market), from 3rd August 2010 to 10th July 2012. The level form data follows the unit root time series process, and the difference form, and return form data follow stationary process. This broadly supports the 'weak form efficient market' hypothesis. However, the market capitalization index, and FJ$/US$ rates are cointegrated. The cointegrating coefficient of the FJ dollar is negatively related to the market capitalization index, and therefore, the FJ dollar depreciation stimulates the Fiji market capitalization index. The changes in the market capitalization index is related to the long run trend factors in FJ dollar index as revealed in the error correction model. The return data especially that of the Fiji stock market do not follow a normal distribution and is leptokurtic and skewed to the right. The return data of FJ dollar, do not Granger cause the return data of the Fiji stock market return in the short run without an error correcting factor equation and vice versa as well. This supports the semi-strong form of efficient market hypothesis, though more studies on markets integration are recommended by us, and we recommend more policy intervention to create more liquidity and depth in Fiji stock markets and to make it further open to international investments