Do exchange rates follow random walks? A variance ratio test of the Zambian foreignexchange market

  • D Mbululu
  • CJ Auret
  • L Chiliba
Keywords: variance ratio tests, random-walk hypothesis, exchange rates, marketefficiency

Abstract

The random-walk hypothesis in foreign-exchange rates market is one of the most researched areas, particularly in developed economies. However, emerging markets in sub-Saharan Africa have received little attention in this regard. This study applies Lo and MacKinlay’s (1988) conventional variance ratio test and Wright’s (2000) non-parametric ranks- and signs-based variance ratio tests to examine the validity of the random-walk hypothesis in the Zambian foreign-exchange market. The study utilises daily nominal United States dollar/Zambian kwacha (USD/ZMK) exchange-rate returns for data from August 2003 to December 2012. Both types of variance ratio tests reject the random-walk hypothesis over the data span. The implication is that technical and fundamental analysis can help traders and other investors to earn higher-than-average market returns.

Key words: variance ratio tests, random-walk hypothesis, exchange rates, marketefficiency

Published
2014-12-17
Section
Articles

Journal Identifiers


eISSN: 1998-8125
print ISSN: 1561-896X