Advanced Search
MyIDEAS: Login to save this paper or follow this series

Exchange-Rate Return Predictability and the Adaptive Markets Hypothesis: Evidence from Major Foreign Exchange Rates

Contents:

Author Info

  • Amélie Charles

    (Audencia Nantes, School of Management - Audencia, School of Management)

  • Olivier Darné

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)

  • Jae H. Kim

    ()
    (School of Economics and Finance - School of Economics and Finance)

Abstract

This study examines return predictability of major foreign exchange rates by testing for martingale difference hypothesis (MDH) using daily and weekly nominal exchange rates from 1975 to 2009. We use alternative MDH tests for linear and nonlinear dependence, which include wild bootstrap automatic variance ratio test, generalized spectral test, and consistent tests. We evaluate time-varying return predictability by applying these tests with fixed-length moving sub-sample windows of two years. While exchange rate returns are found to be unpredictable most of times, we do observe episodes of statistically significant return predictability. They are associated with coordinated central bank interventions and the subprime mortgage crisis in 2007. This finding suggests that return predictability of foreign exchange rates occurs from time to time depending on changing market conditions, which is consistent with the implications of the adaptive markets hypothesis.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hal.archives-ouvertes.fr/docs/00/54/77/22/PDF/LEMNA_WP_201037.pdf
Download Restriction: no

Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00547722.

as in new window
Length:
Date of creation: 26 Nov 2010
Date of revision:
Handle: RePEc:hal:wpaper:hal-00547722

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00547722/en/
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/

Related research

Keywords: Adaptive markets hypothesis ; martingale difference hypothesis ; variance ratio test ; spectral test;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hong, Yongmiao, 1996. "Consistent Testing for Serial Correlation of Unknown Form," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 837-64, July.
  2. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(1), pages 161-190, February.
  3. Yongmiao Hong & Tae-Hwy Lee, 2003. "Inference on Predictability of Foreign Exchange Rates via Generalized Spectrum and Nonlinear Time Series Models," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1048-1062, November.
  4. Fong, Wai Mun & Ouliaris, Sam, 1995. "Spectral Tests of the Martingale Hypothesis for Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 10(3), pages 255-71, July-Sept.
  5. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  6. Chang-Jin Kim & James Morley & Jeremy Piger, 2008. "Bayesian counterfactual analysis of the sources of the great moderation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(2), pages 173-191.
  7. Andrew W. Lo & Craig A. MacKinlay, . "The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 28-87, Wharton School Rodney L. White Center for Financial Research.
  8. Belaire-Franch, Jorge & Opong, Kwaku K., 2005. "Some evidence of random walk behavior of Euro exchange rates using ranks and signs," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(7), pages 1631-1643, July.
  9. Fong, Wai Mun & Koh, Seng Kee & Ouliaris, Sam, 1997. "Joint Variance-Ratio Tests of the Martingale Hypothesis for Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 15(1), pages 51-59, January.
  10. Yuanchen Chang, 2004. "A re-examination of variance-ratio test of random walks in foreign exchange rates," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(9), pages 671-679.
  11. Christopher J. Neely, 2002. "The temporal pattern of trading rule returns and central bank intervention: intervention does not generate technical trading rule profits," Working Papers, Federal Reserve Bank of St. Louis 2000-018, Federal Reserve Bank of St. Louis.
  12. Kuan Chung-Ming & Lee Wei-Ming, 2004. "A New Test of the Martingale Difference Hypothesis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 8(4), pages 1-26, December.
  13. Dominguez, Kathryn M.E., 2006. "When do central bank interventions influence intra-daily and longer-term exchange rate movements?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(7), pages 1051-1071, November.
  14. Wright, Jonathan H, 2000. "Alternative Variance-Ratio Tests Using Ranks and Signs," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 18(1), pages 1-9, January.
  15. Jeon, Bang Nam & Seo, Byeongseon, 2003. "The impact of the Asian financial crisis on foreign exchange market efficiency: The case of East Asian countries," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 11(4), pages 509-525, September.
  16. Szakmary, Andrew C. & Mathur, Ike, 1997. "Central bank intervention and trading rule profits in foreign exchange markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(4), pages 513-535, August.
  17. Amélie Charles & Olivier Darné, 2009. "Variance-Ratio Tests Of Random Walk: An Overview," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 23(3), pages 503-527, 07.
  18. J. Carlos Escanciano & Carlos Velasco, 2003. "Generalized Spectral Tests For The Martingale Difference Hypothesis," Statistics and Econometrics Working Papers, Universidad Carlos III, Departamento de Estadística y Econometría ws035212, Universidad Carlos III, Departamento de Estadística y Econometría.
  19. Melvin, Michael & Taylor, Mark P, 2009. "The Crisis in the Foreign Exchange Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7472, C.E.P.R. Discussion Papers.
  20. Yongmiao Hong & Yoon-Jin Lee, 2005. "Generalized Spectral Tests for Conditional Mean Models in Time Series with Conditional Heteroscedasticity of Unknown Form," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 499-541.
  21. Al-Khazali, Osamah M. & Leduc, Guillaume & Pyun, Chong Soo, 2011. "Market efficiency of floating exchange rate systems: Some evidence from Pacific-Asian countries," Global Finance Journal, Elsevier, vol. 22(2), pages 154-168.
  22. Jordi Gali & Luca Gambetti, 2008. "On the Sources of the Great Moderation," NBER Working Papers 14171, National Bureau of Economic Research, Inc.
  23. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  24. Lobato, I.N. & Nankervis, John C. & Savin, N.E., 2002. "Testing For Zero Autocorrelation In The Presence Of Statistical Dependence," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(03), pages 730-743, June.
  25. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 817-58, May.
  26. Dominguez & K., 1997. "The Market Microstructure of Central Bank Intervention," Working Papers, Research Seminar in International Economics, University of Michigan 412, Research Seminar in International Economics, University of Michigan.
  27. Kim, Jae H., 2009. "Automatic variance ratio test under conditional heteroskedasticity," Finance Research Letters, Elsevier, Elsevier, vol. 6(3), pages 179-185, September.
  28. Lobato, Ignacio & Nankervis, John C & Savin, N E, 2001. "Testing for Autocorrelation Using a Modified Box-Pierce Q Test," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 187-205, February.
  29. Deo, Rohit S., 2000. "Spectral tests of the martingale hypothesis under conditional heteroscedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 99(2), pages 291-315, December.
  30. Neely, Christopher J. & Weller, Paul A. & Ulrich, Joshua M., 2009. "The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 44(02), pages 467-488, April.
  31. Willa Chen & Rohit Deo, 2005. "The Variance Ratio Statistic at large Horizons," Econometrics, EconWPA 0501003, EconWPA.
  32. Hoque, Hafiz A.A.B. & Kim, Jae H. & Pyun, Chong Soo, 2007. "A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets," International Review of Economics & Finance, Elsevier, Elsevier, vol. 16(4), pages 488-502.
  33. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
  34. Whang, Yoon-Jae & Kim, Jinho, 2003. "A multiple variance ratio test using subsampling," Economics Letters, Elsevier, Elsevier, vol. 79(2), pages 225-230, May.
  35. Kim, Jae H. & Shamsuddin, Abul, 2008. "Are Asian stock markets efficient? Evidence from new multiple variance ratio tests," Journal of Empirical Finance, Elsevier, Elsevier, vol. 15(3), pages 518-532, June.
  36. Yilmaz, Kamil, 2003. "Martingale Property of Exchange Rates and Central Bank Interventions," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 21(3), pages 383-95, July.
  37. Amélie Charles & Olivier Darné & Jae H Kim, 2010. "Small Sample Properties of Alternative Tests for Martingale Difference Hypothesis," Working Papers, School of Economics, La Trobe University 2010.07, School of Economics, La Trobe University.
  38. LeBaron, B., 1996. "Technical Trading Rule Profitability and Foreing Exchange Intervention," Working papers, Wisconsin Madison - Social Systems 9445r, Wisconsin Madison - Social Systems.
  39. Michel Beine & Paul De Grauwe & Marianna Grimaldi, 2005. "The Impact of FX Central Bank Intervention in a Noise Trading Framework," CESifo Working Paper Series 1520, CESifo Group Munich.
  40. Po-Hsuan Hsu & Chung-Ming Kuan, 2005. "Reexamining the Profitability of Technical Analysis with Data Snooping Checks," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(4), pages 606-628.
  41. Escanciano, J. Carlos & Lobato, Ignacio N., 2009. "An automatic Portmanteau test for serial correlation," Journal of Econometrics, Elsevier, Elsevier, vol. 151(2), pages 140-149, August.
  42. Jorge Belaire-Franch & Kwaku Opong, 2010. "Testing for random walk in euro exchange rates using the subsampling approach," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(12), pages 1145-1151.
  43. Kim, Jae H., 2006. "Wild bootstrapping variance ratio tests," Economics Letters, Elsevier, Elsevier, vol. 92(1), pages 38-43, July.
  44. Neely, Christopher J., 2002. "The temporal pattern of trading rule returns and exchange rate intervention: intervention does not generate technical trading profits," Journal of International Economics, Elsevier, Elsevier, vol. 58(1), pages 211-232, October.
  45. Chortareas, Georgios & Jiang, Ying & Nankervis, John C., 2011. "The random-walk behavior of the Euro exchange rate," Finance Research Letters, Elsevier, Elsevier, vol. 8(3), pages 158-162, September.
  46. Chow, K. Victor & Denning, Karen C., 1993. "A simple multiple variance ratio test," Journal of Econometrics, Elsevier, Elsevier, vol. 58(3), pages 385-401, August.
  47. Graham Smith & Keith Jefferis & Hyun-Jung Ryoo, 2002. "African stock markets: multiple variance ratio tests of random walks," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(7), pages 475-484.
  48. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1356-69, December.
  49. Bang Nam Jeon & Euiseong Lee, 2002. "Foreign exchange market efficiency, cointegration, and policy coordination," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(1), pages 61-68.
  50. Choi, In, 1999. "Testing the Random Walk Hypothesis for Real Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(3), pages 293-308, May-June.
  51. Dominguez, Kathryn Mary, 1990. "Market responses to coordinated central bank intervention," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 32(1), pages 121-163, January.
  52. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(2), pages 227-54.
  53. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, Econometric Society, vol. 68(5), pages 1097-1126, September.
  54. Enders, Walter & Ma, Jun, 2011. "Sources of the great moderation: A time-series analysis of GDP subsectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(1), pages 67-79, January.
  55. Liu, Christina Y & He, Jia, 1991. " A Variance-Ratio Test of Random Walks in Foreign Exchange Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 773-85, June.
  56. Nankervis, John C. & Savin, N. E., 2010. "Testing for Serial Correlation: Generalized Andrews–Ploberger Tests," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 28(2), pages 246-255.
  57. Amelie Charles & Olivier Darne, 2009. "Testing for Random Walk Behavior in Euro Exchange Rates," Economie Internationale, CEPII research center, CEPII research center, issue 119, pages 25-45.
  58. Chuluun, Tuugi & Eun, Cheol S. & Kiliç, Rehim, 2011. "Investment intensity of currencies and the random walk hypothesis: Cross-currency evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(2), pages 372-387, February.
  59. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, Elsevier, vol. 21(2), pages 238-259, June.
  60. Chiang, Shu-Mei & Lee, Yen-Hsien & Su, Hsin-Mei & Tzou, Yi-Pin, 2010. "Efficiency tests of foreign exchange markets for four Asian Countries," Research in International Business and Finance, Elsevier, Elsevier, vol. 24(3), pages 284-294, September.
  61. Hansen, Peter Reinhard, 2005. "A Test for Superior Predictive Ability," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 23, pages 365-380, October.
  62. Ahmad, Rubi & Rhee, S. Ghon & Wong, Yuen Meng, 2012. "Foreign exchange market efficiency under recent crises: Asia-Pacific focus," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(6), pages 1574-1592.
  63. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  64. Lukas Menkhoff, 2008. "High-Frequency Analysis of Foreign Exchange Interventions: What do we learn?," CESifo Working Paper Series 2473, CESifo Group Munich.
  65. Kian‐Ping Lim & Robert Brooks, 2011. "The Evolution Of Stock Market Efficiency Over Time: A Survey Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 25(1), pages 69-108, 02.
  66. Kim, Jae H. & Shamsuddin, Abul & Lim, Kian-Ping, 2011. "Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data," Journal of Empirical Finance, Elsevier, Elsevier, vol. 18(5), pages 868-879.
  67. Belaire-Franch Jorge & Contreras Dulce, 2010. "Testing the Martingale Property of Exchange Rates: A Replication," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 15(1), pages 1-19, December.
  68. Horowitz, Joel L. & Lobato, I.N. & Nankervis, John C. & Savin, N.E., 2006. "Bootstrapping the Box-Pierce Q test: A robust test of uncorrelatedness," Journal of Econometrics, Elsevier, Elsevier, vol. 133(2), pages 841-862, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Hiremath, Gourishankar S & Kumari, Jyoti, 2013. "Stock Returns Predictability and the Adaptive Market Hypothesis: Evidence from India," MPRA Paper 52581, University Library of Munich, Germany.
  2. Lazăr, Dorina & Todea, Alexandru & Filip, Diana, 2012. "Martingale difference hypothesis and financial crisis: Empirical evidence from European emerging foreign exchange markets," Economic Systems, Elsevier, Elsevier, vol. 36(3), pages 338-350.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00547722. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.