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  • 2013 Fall: Volume 11, Issue 2
  • Do Exchange Rates Follow Random Walks? Evidence from the Currency Market in New York

    • Ingyu Chiou ;
    • John R. Willems

    Title:

    Do Exchange Rates Follow Random Walks? Evidence from the Currency Market in New York

    Author(s):

    Ingyu Chiou
    John R. Willems

    Publication Date:

    2013

    Journal Title:

    The Journal of Finance Issues

    Volume Number:

    11

    Issue Number:

    2

    Abstract:

    This paper employs non-parametric methods to study the efficiency of four major exchange rates ($/British pound, $/euro, $/Swiss franc, and $/yen), using daily data over the period 1999-2011. Our major findings are as follows. First, each exchange rate is not normally distributed. Second, each exchange rate does not follow a random walk in the runs up and down test. Third, each exchange rate does not follow a random walk in the runs above and below a central point test. We suggest that different time zones of two currencies in an exchange rate, government interventions, and exchange rate overshooting or undershooting may result in market inefficiency. If the transaction cost is small and the foreign exchange market is not weak-form efficient, investors may be able to explore profitable opportunities. Overall, our new evidence suggests that these four exchange rates do not follow a random walk. This result is not consistent with the literature.