Dedollarization and market efficiency: A trade arbitrage perspective in the BRICS and WAEMU nations

Abstract

This paper appraises the dedollarization and market efficiency of BRICS and WAEMU nations with due reference to the trade arbitrage perspective. Using daily policy rates, spot rates and forward rates from January 2015 to March 2023, the study uses a trio approach: Hurst exponent analysis vis-à-vis sentimental analysis, FRUH analysis and CIP analysis. Hurst exponent analysis reveals that all currencies have long memory tendencies for both rolling windows (2015-2019; 2019-2023), thus contradicting weak-form efficiency. However, the Chinese Yuan, Russian Rubble, and South African Rand exhibit deteriorating levels of efficiency as the Hurst exponent increases between the two periods. This finding is complemented by the sentimental analysis, which shows that, on average, the second rolling window has an increased positive sentiment level toward the emergence of a new reserve currency. Integrating the trajectory of returns on the Yuan against the sentiment score trend yields interesting results, as it shows a trail thus underpinning Yuanization. Employing the FRUH and CIP analyses as robustness checks yields similar results for long decay in arbitrage opportunities, as the coefficients and deviations significantly depart from the 1:1 threshold.