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Tests of the Martingale Hypothesis for Foreign Currency Futures with Time-Varying Volatility

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Author Info
Thomas H. McCurdy
Ieuan G. Morgan

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Abstract

This paper tests the martingale hypothesis for daily and weekly rates of change of futures prices for five currencies. Daily data suggests evidence against the null for each currency. Trading day effects in foreign currency futures and spot prices introduce complicated day of the week patterns in futures prices. For this reason, we retest the martingale hypothesis using weekly data and reject the null for only one currency. For this currency, one interpretation is that of a time-varying risk premium.

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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 663.

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Length: 32 pages
Date of creation: 1986
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Handle: RePEc:qed:wpaper:663

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  1. Nijman, T.E. & Roon, F.A. de & Veld, C., 1996. "Pricing term structure risk in futures markets," Discussion Paper 78, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 855-889. [Downloadable!]
  3. Atreya Chakraborty, John T. Barkoulas, 1999. "Dynamic futures hedging in currency markets," European Journal of Finance, Taylor and Francis Journals, vol. 5(4), pages 299-314, December. [Downloadable!] (restricted)
  4. Tim Bollerslev & Ray Y. Chou & Narayanan Jayaraman & Kenneth F. Kroner, 1991. "Les modéles ARCH en finance : un point sur la théorie et les résultats empiriques," Annales d'Economie et de Statistique, ADRES, issue 24, pages 01, Octobre-D. [Downloadable!]
  5. Roberta Colavecchio & Michael Funke, 2008. "Volatility Transmission between Renminbi and Asia-Pacific on-shore and off-shore U.S. dollar futures," Quantitative Macroeconomics Working Papers 20803, Hamburg University, Department of Economics. [Downloadable!]
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  6. Geoffrey F. Loudon & Wing H. Watt & Pradeep K. Yadav, 2000. "An empirical analysis of alternative parametric ARCH models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(2), pages 117-136. [Downloadable!]
  7. M. Angeles Carnero & Daniel Peña & Esther Ruiz, 2001. "Outliers And Conditional Autoregressive Heteroscedasticity In Time Series," Statistics and Econometrics Working Papers ws010704, Universidad Carlos III, Departamento de Estadística y Econometría. [Downloadable!]
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