This thesis examines lead-lag relationship between won/dollar spot and Non-Deliverable Forward contract and ex-post arbitrage profitability between these two markets to see whether spot market efficiency is enhanced by the first and second liberalization on foreign exchange which were occurred in Apr. 1999 and in Jan. 2001 respectively as an aftermath of financial reform after the Asian financial crisis in Dec. 1997. The hypothesis is that current information flow between these two markets are very interactive and spot market operates efficiently because of 2-stage liberalization on foreign exchange. This thesis analyzed daily closing data from Sept. 1997 to Oct. 2002 which were divided into 6 terms using Cointegration Analysis and Error Correction model. This study confirmed current information flow between the spot and NDF is interactive. The test result on ex post arbitrage profitability shows that the rate of fair valuation is greatly enhanced from over 23% to over 98% after liberalization. Current arbitrage profit between these two markets is almost zero.
This thesis conclude based on these two results that spot market interacts with NDF in lead-lag relationship and that spot market operates efficiently since inception of 2-stage liberalization on foreign exchange.
