The Impact of Artificial Intelligence and Digitalization on the Foreign Exchange Market

Abstract

This study investigates the impact of artificial intelligence capability and digitalization on foreign exchange (FX) market performance in Malaysia over the period 2015–2024. Using the MYR/USD exchange rate, the analysis focuses on three key dimensions: volatility persistence, price discovery efficiency, and market resilience and stability. The full sample consists of 10 annual observations and a quantitative time-series framework is employed, integrating econometric modeling with machine-learning validation techniques. The results from baseline regression models indicate that both artificial intelligence capability and digitalization are significantly associated with lower volatility persistence, higher price discovery efficiency, and stronger market resilience. The interaction between these variables shows a strong complementary association, suggesting that digital infrastructure amplifies the benefits of AI in financial markets. Robustness checks using LASSO and Random Forest confirm the consistency of these findings. Additionally, Diebold–Mariano tests reveal no significant differences in predictive performance across models. The study contributes by integrating AI capability and digitalization into a unified FX-market framework and by showing that technological complementarity is associated with market efficiency, stability, and adaptive capacity in an emerging-market context.