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

Author

Listed:
  • Amélie Charles

    (Audencia Business School)

  • Olivier Darné

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

  • 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.

Suggested Citation

  • Amélie Charles & Olivier Darné & Jae H. Kim, 2010. "Exchange-Rate Return Predictability and the Adaptive Markets Hypothesis: Evidence from Major Foreign Exchange Rates," Working Papers hal-00547722, HAL.
    • Handle: RePEc:hal:wpaper:hal-00547722
    Note: View the original document on HAL open archive server: https://hal.science/hal-00547722v1
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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