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

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.