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Testing the Random Walk Hypothesis for Real Exchange Rates

Testing the Random Walk Hypothesis for Real Exchange Rates

Rui Teixeira Dias, Pedro Pardal, Hortense Santos, Cristina Vasco
ISBN13: 9781799869269|ISBN10: 1799869261|EISBN13: 9781799869276
DOI: 10.4018/978-1-7998-6926-9.ch017
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MLA

Dias, Rui Teixeira, et al. "Testing the Random Walk Hypothesis for Real Exchange Rates." Handbook of Research on Reinventing Economies and Organizations Following a Global Health Crisis, edited by Teresa Gomes da Costa, et al., IGI Global, 2021, pp. 304-322. https://doi.org/10.4018/978-1-7998-6926-9.ch017

APA

Dias, R. T., Pardal, P., Santos, H., & Vasco, C. (2021). Testing the Random Walk Hypothesis for Real Exchange Rates. In T. Costa, I. Lisboa, & N. Teixeira (Eds.), Handbook of Research on Reinventing Economies and Organizations Following a Global Health Crisis (pp. 304-322). IGI Global. https://doi.org/10.4018/978-1-7998-6926-9.ch017

Chicago

Dias, Rui Teixeira, et al. "Testing the Random Walk Hypothesis for Real Exchange Rates." In Handbook of Research on Reinventing Economies and Organizations Following a Global Health Crisis, edited by Teresa Gomes da Costa, InĂªs Lisboa, and Nuno Miguel Teixeira, 304-322. Hershey, PA: IGI Global, 2021. https://doi.org/10.4018/978-1-7998-6926-9.ch017

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Abstract

This chapter aims to analyze the efficiency, in its weak form, in the exchange rates of Brazil vs. USA, Australia, Canada, Europe (Euro Zone), Switzerland, United Kingdom, and Japan from July 1, 2019 to September 20, 2020. The results suggest that exchange rates show signs of (in)efficiency, in their weak form (i.e., the values of the variance ratios are lower than the unit), which implies that returns are autocorrelated over time, and there is reversal to the average. In corroboration, the results of detrended fluctuation analysis (DFA) show persistence in yields (i.e., the existence of long memories), thus validating the results of the Lo and Mackinlay model that show autocorrelation between the series of yields. As a conclusion, the authors show that the assumption of market efficiency may be questioned, since the forecast of market movement may be improved if the lagged movements of the other markets are taken into account, allowing the occurrence of arbitrage operations in these foreign exchange markets.

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