Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates

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 three alternative tests for the MDH, which include the wild bootstrap automatic variance ratio test, generalized spectral test, and Dominguez-Lobato consistent tests. We evaluate time-varying return predictability by applying these tests with fixed-length moving sub-sample windows. While exchange rate returns are found to be unpredictable most of times, we do observe a number of episodes of statistically significant return predictability. They are mostly associated with the major events such as coordinated central bank interventions and financial crises. This finding suggests that return predictability of foreign exchange rates occurs from time to time depending on changing market conditions, consistent with the implications of the adaptive markets hypothesis.
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Journal of International Money and Finance, Elsevier, 2012, 31 (6), pp.1607-1626. 〈10.1016/j.jimonfin.2012.03.003〉
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Amélie Charles, Olivier Darné, Jae H. Kim. Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates. Journal of International Money and Finance, Elsevier, 2012, 31 (6), pp.1607-1626. 〈10.1016/j.jimonfin.2012.03.003〉. 〈hal-00958288〉

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