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Investment intensity of currencies and the random walk hypothesis: Cross-currency evidence

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  • Chuluun, Tuugi
  • Eun, Cheol S.
  • Kiliç, Rehim

Abstract

This paper studies the cross-currency and temporal variations in the random walk behavior in exchange rates. We characterize currencies with relatively large investment flows as investment intensive and conjecture that the more investment intensive a currency is, the closer its exchange rate adheres to random walk. Using 29 floating bilateral USD exchange rates, we find that the higher the investment intensity, the less likely it is to reject random walk and the smaller the deviation from random walk is. However, the effect of investment intensity is non-monotonic. Application of threshold models shows that after investment intensity reaches the estimated thresholds, the level of investment intensity has no further effect on the deviation from random walk. These findings help reconcile the previous conflicting results on the random walk in exchange rates by focusing on the effect of cross-currency and temporal variations in investment intensity.

Suggested Citation

  • 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, vol. 35(2), pages 372-387, February.
  • Handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:372-387
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    2. 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, vol. 18(5), pages 868-879.
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    6. Andrés González & Timo Teräsvirta & Dick van Dijk & Yukai Yang, 1910. "Panel Smooth Transition Regression Models," CREATES Research Papers 2017-36, Department of Economics and Business Economics, Aarhus University.
    7. Fahad Almudhaf, 2014. "Testing for random walk behaviour in CIVETS exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 21(1), pages 60-63, January.
    8. Li, Leon & Chen, Carl R., 2016. "Analysts' forecast dispersion and stock returns: a panel threshold regression analysis based on conditional limited market participation hypothesis," Finance Research Letters, Elsevier, vol. 18(C), pages 100-107.
    9. Ntim, Collins G. & English, John & Nwachukwu, Jacinta & Wang, Yan, 2015. "On the efficiency of the global gold markets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 218-236.
    10. Stosic, Darko & Stosic, Dusan & Ludermir, Teresa & de Oliveira, Wilson & Stosic, Tatijana, 2016. "Foreign exchange rate entropy evolution during financial crises," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 449(C), pages 233-239.
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