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Testing the Martingale Difference Hypothesis (MDH) with Structural Breaks: Evidence from Foreign Exchanges of Nigeria and South Africa

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  • Afees A. Salisu
  • Taofeek O. Ayinde

Abstract

This study tests for MDH in two prominent foreign exchange (FX) markets in Africa, Nigeria and South Africa using three benchmark currencies (euro, dollar and pound sterling). Data utilized cover time series closing rate data set of five-day weekly frequency spanning December 14, 2001 to September 26, 2014. The study considers both the linear and nonlinear measures for MDH with better size and power properties. We also capture structural break endogenously from the data stream using Perron (2006) unit root test with structural break. Three striking findings are discernible from our analyses. First, on average, the South African FX market appears to be more efficient than the Nigerian FX market. Thus, the latter may be more susceptible to speculations than the former. Second, ignoring significant structural breaks may render statistical inferences invalid. Third, the choice of methodology does matter when testing for MDH of foreign exchanges in Africa.

Suggested Citation

  • Afees A. Salisu & Taofeek O. Ayinde, 2016. "Testing the Martingale Difference Hypothesis (MDH) with Structural Breaks: Evidence from Foreign Exchanges of Nigeria and South Africa," Journal of African Business, Taylor & Francis Journals, vol. 17(3), pages 342-359, September.
    • Handle: RePEc:taf:wjabxx:v:17:y:2016:i:3:p:342-359
    DOI: 10.1080/15228916.2016.1183274
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    2. Sashikanta Khuntia & J. K. Pattanayak, 2020. "Evolving Efficiency of Exchange Rate Movement: An Evidence from Indian Foreign Exchange Market," Global Business Review, International Management Institute, vol. 21(4), pages 956-969, August.
    3. Omane-Adjepong, Maurice & Boako, Gidoen & Alagidede, Paul, 2018. "Modelling heterogeneous speculation in Ghana’s foreign exchange market: Evidence from ARFIMA-FIGARCH and Semi-Parametric methods," MPRA Paper 86617, University Library of Munich, Germany.

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