Do Euro Exchange Rates Follow a Martingale? Some Out-of-Sample Evidence

41 Pages Posted: 20 Aug 2007 Last revised: 19 Oct 2011

See all articles by Jian Yang

Jian Yang

University of Colorado at Denver - Business School

Xiaojing Su

affiliation not provided to SSRN

James W. Kolari

Texas A&M University - Department of Finance

Abstract

Traditional autocorrelation and variance ratio tests are based on serial uncorrelatedness rather than martingale difference. As such, they do not capture potential nonlinearity-in-mean, which could lead to misleading inferences in favor of the martingale hypothesis. This paper employs various parametric and nonparametric nonlinear models as well as several model comparison criteria to examine the potential martingale behavior of Euro exchange rates in the context of out-of-sample forecasts. The overall evidence indicates that, while martingale behavior cannot be rejected for Euro exchange rates with major currencies such as the Japanese yen, British pound, and U.S. dollar, there is nonlinear predictability in terms of economic criteria with respect to several smaller currencies.

Keywords: Euro exchange rates, martingale, nonlinear models, technical trading rule, forecasting evaluation

JEL Classification: C2, C5, F3

Suggested Citation

Yang, Jian and Su, Xiaojing and Kolari, James W., Do Euro Exchange Rates Follow a Martingale? Some Out-of-Sample Evidence. Journal of Banking and Finance, 2008. Available at SSRN: https://ssrn.com/abstract=1008042

Jian Yang (Contact Author)

University of Colorado at Denver - Business School ( email )

1250 14th St.
Denver, CO 80204
United States

Xiaojing Su

affiliation not provided to SSRN

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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