Martingale Property of Exchange Rates and Central Bank Interventions
33 Pages Posted: 23 Aug 2001
Date Written: June 2001
This paper uses the variance-ratio-based multiple comparison test and Richardson-Smith's Wald test procedures to test for martingale property of daily exchange rates of seven major currencies vis-a-vis US dollar. To allow for the possibility that exchange rates are not governed by a single process throughout the float, we calculate and plot the test statistics for fixed-length moving subsample windows rather than applying the tests to the full sample. The results show that exchange rates do not always follow the martingale process. The results show that during the times of coordinated central bank intervention exchange rates deviate from martingale property.
Keywords: Exchange rates, Martingale, Variance ratio test, FX market intervention
JEL Classification: F31, G15
Suggested Citation: Suggested Citation