Testing Random Walk Hypothesis in Turkish Foreign Exchange Market

Testing Random Walk Hypothesis in Turkish Foreign Exchange Market

Levent Çıtak (Erciyes University, Turkey), Veli Akel (Erciyes University, Turkey) and Murat Çetin (Namık Kemal University, Turkey)
DOI: 10.4018/978-1-4666-7288-8.ch004
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Abstract

This chapter revisits the empirical validity of the weak-form efficient market hypothesis for Turkish foreign exchange markets. The random-walk hypothesis in foreign-exchange rates market is one of the most researched areas, particularly in developed economies. This chapter applies ADF and PP unit root test, Lo and MacKinlay's (1988) conventional variance ratio test and Ljung-Box Q tests to examine the validity of the random-walk hypothesis in the Turkish foreign-exchange market. The chapter utilizes weekly nominal TRY/USD exchange rate for data from January 2000 to December 2013. The results provide evidence rejecting the random walk hypothesis for weekly nominal exchange rate series.
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Literature Review

As far as the literature on efficient markets and random walk hypothesis is concerned, we aim to review selected papers on the validity of efficiency and random walk in foreign exchange markets with a special emphasis on variance ratio test.

Key Terms in this Chapter

Foreign Exchange Market: The market in which foreign exchange currencies are traded and their conversion rates are determined. The participants of the market are banks, firms, central banks, investment management firms, hedge funds, and investors.

Ljung-Box Q tests: It is an alternative test for return predictability based on serial correlation of return.

Variance Ratio: The variance ratio test is to examine the Random Walk Hypothesis by comparing the variances of the increments from different lengths of time interval.

Market Efficiency: The term suggests that prices fully reflect all available and relevant information on a particular stock, exchange rate and/or market. It is formulated by Eugene Fama in 1970.

Random Walk Hypothesis: The hypothesis states that markets are efficient and prices at any given time will represent good estimates of intrinsic or fundamental values. If prices follow a random walk, there will be no use in trying to predict the future prices and beat the market consistently.

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