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A Variance-Ratio Test of Random Walks in Foreign Exchange Rates

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Author Info
 Liu, Christina Y
He, Jia
Abstract

The separate variance-ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis using five pairs of weekly nominal exchange rate series over the period from August 7, 1974, to March 29, 1989. The rejections cast doubt on the random walk hypothesis in exchange rates, which has received support in the existing literature. Furthermore, since the rejections are robust to heteroscedasticity, they suggest autocorrelations of weekly increments in the nominal exchange rate series, which may be consistent with the exchange rate overshooting or undershooting phenomenon. Copyright 1991 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 46 (1991)
Issue (Month): 2 (June)
Pages: 773-85
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Handle: RePEc:bla:jfinan:v:46:y:1991:i:2:p:773-85

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  5. Young-Sook Lee & Tae-Hwan Kim & Paul Newbold, 2005. "Revisiting the Martingale hypothesis for exchange rates," Money Macro and Finance (MMF) Research Group Conference 2005 19, Money Macro and Finance Research Group. [Downloadable!]
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  7. Ariño, Miguel A. & Canela, Miguel A., 2006. "Study of the dollar-euro exchange rate," IESE Research Papers D/620, IESE Business School, revised 30 Mar 2006. [Downloadable!]
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  9. Kin Lam & May Chun Mei Wong & Wing-Keung Wong, 2005. "New Variance Ratio Tests to Identify Random Walk from the General Mean Reversion Model," Departmental Working Papers wp0514, National University of Singapore, Department of Economics. [Downloadable!]
  10. Guneratne Banda Wickremasinghe, 2004. "Efficiency Of Foreign Exchange Markets: A Developing Country Perspective," International Finance 0406004, EconWPA. [Downloadable!]
  11. Jan Beran & Dirk Ocker, 1999. "SEMIFAR Forecasts, with Applications to Foreign Exchange Rates," CoFE Discussion Paper 99-13, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
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