Empirical Studies of Nigeria's Foreign Exchange Parallel Market II: Speculative Efficiency and Noisy Trading

"The paper is organized as follows: Section II reviews the development of the parallel forex market in Nigeria and Section III looks at the risk/return characteristics implicit in this simplest trading strategy of "buy and hold" an optimal portfolio of currencies. Section IV examines the issue of speculative dynamics—the presence of noise traders in the market. Noise trading has become a popular alternative to the efficient-markets approach. Moreover, the approach accommodates within the same analytical framework, the two competing views—Friedman and Nurske— on the effect of speculative activities on the economy. According to the accommodating view, both types of traders coexist. The issue is whether the activities of noise (as opposed to rational) traders are significant, or dominate the market. Our study ends with a summary and the conclusions from our findings in Section V. We begin with presenting a background on the nature of the parallel market that we analyse"