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Spectral Tests of the Martingale Hypothesis for Exchange Rates

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  • Fong, Wai Mun
  • Ouliaris, Sam

Abstract

A new family of spectral shape tests was proposed recently by Durlauf (1991) for testing the martingale hypothesis. Unlike the widely used variance ratio test, spectral shape tests are consistent against all stationary non-white-noise alternatives from the martingale null. In this paper we examine the finite sample properties of the spectral shape tests and find that the tests have good size and power properties even for small samples. We apply the tests to examine the martingale hypothesis for five major currencies vis-a-vis the U.S. dollar for the period 1974-89. The results indicate that most currencies violate the martingale hypothesis. It appears that some rejections are due to long-memory influences. Copyright 1995 by John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 10 (1995)
Issue (Month): 3 (July-Sept.)
Pages: 255-71

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Handle: RePEc:jae:japmet:v:10:y:1995:i:3:p:255-71

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Cited by:
  1. Pippenger, John, 2008. "Freely Floating Exchange Rates Do Not Systematically Overshoot," University of California at Santa Barbara, Economics Working Paper Series qt97m8z6hw, Department of Economics, UC Santa Barbara.
  2. Chris Brooks & Melvin J. Hinich, 2001. "A New Tool for Detecting Intraday Periodicities with Application to High Frequency Exchange Rates," ICMA Centre Discussion Papers in Finance icma-dp2001-04, Henley Business School, Reading University.
  3. Pippenger, John, 2012. "The Fragility of Overshooting," University of California at Santa Barbara, Economics Working Paper Series qt4rd5j98c, Department of Economics, UC Santa Barbara.
  4. Juan Carlos Escanciano, 2005. "On the Asymptotic Power Properties of Specification Tests for Dynamic Parametric Regressions," Faculty Working Papers 07/05, School of Economics and Business Administration, University of Navarra.
  5. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2012. "Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1607-1626.
  6. Jan Beran, 1999. "SEMIFAR Models - A Semiparametric Framework for Modelling Trends, Long Range Dependence and Nonstationarity," CoFE Discussion Paper 99-16, Center of Finance and Econometrics, University of Konstanz.
  7. Jan Beran & Yuanhua Feng & Günter Franke & Dieter Hess & Dirk Ocker, 1999. "SEMIFAR Models, with Applications to Commodities, Exchange Rates and the Volatility of Stock Market Indices," CoFE Discussion Paper 99-18, Center of Finance and Econometrics, University of Konstanz.
  8. Peter C.B. Phillips & Sainan Jin, 2013. "Testing the Martingale Hypothesis," Cowles Foundation Discussion Papers 1912, Cowles Foundation for Research in Economics, Yale University.
  9. J. Carlos Escanciano & Carlos Velasco, 2003. "Generalized Spectral Tests For The Martingale Difference Hypothesis," Statistics and Econometrics Working Papers ws035212, Universidad Carlos III, Departamento de Estadística y Econometría.
  10. McPherson, Matthew Q. & Palardy, Joseph & Vilasuso, Jon, 2005. "Are international stock returns predictable?: An application of spectral shape tests corrected for heteroskedasticity," Journal of Economics and Business, Elsevier, vol. 57(2), pages 103-118.
  11. Beran, Jan & Feng, Yuanhua & Ocker, Dirk, 1999. "SEMIFAR models," Technical Reports 1999,03, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  12. Chris Brooks & Melvin. J. Hinich & Douglas M. Patterson, 2003. "Intra-day Patterns in the Returns, Bidask Spereads, and Trading Volume of Stocks Traded on the New York Stock Exchange," ICMA Centre Discussion Papers in Finance icma-dp2003-14, Henley Business School, Reading University.
  13. Choi, In, 1999. "Testing the Random Walk Hypothesis for Real Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(3), pages 293-308, May-June.

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