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Testing the Martingale Hypothesis in the Deutschmark/US dollar Futures and Spot Markets

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  • Thomas H. McCurdy
  • Ieuan G. Morgan

Abstract

This paper tests the martingale hypothesis for daily data from the Deutschmark/US dollar futures and spot foreign exchange markets. Time-varying volatility of daily price changes is modelled as conditional heteroskedasticity which is a function of recent news or forecast errors, as in the ARCH model of Engle (1982). We find that the GARCH generalization of ARCH due to Bollerslev (1985) results in a very effective and parsimonious model. In both the futures and spot markets it provides a test equation which is not rejected. Apart from the relevance of the weekend effect, our test results support the martingale hypothesis for the Deutschmark/US dollar futures market.

Suggested Citation

  • Thomas H. McCurdy & Ieuan G. Morgan, 1985. "Testing the Martingale Hypothesis in the Deutschmark/US dollar Futures and Spot Markets," Working Paper 639, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:639
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    Cited by:

    1. Gregory, Allan W, 1989. "A Nonparametric Test for Autoregressive Conditional Heteroscedasticity: A Markov-Chain Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(1), pages 107-115, January.
    2. McCurdy, Thomas H. & Morgan, Ieuan G., 1987. "Tests of the martingale hypothesis for foreign currency futures with time-varying volatility," International Journal of Forecasting, Elsevier, vol. 3(1), pages 131-148.
    3. John D. Levendis, 2018. "Time Series Econometrics," Springer Texts in Business and Economics, Springer, number 978-3-319-98282-3, August.

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