JOINT VARIANCE-RATIO TESTS OF THE MARTINGALE HYPOTHESIS FOR EXCHANGE-RATES

There is considerable interest in whether exchange rates behave like m artingales. Liu and He tested the martingale hypothesis for exchange r ates using the variance-ratio methodology of Lo and MacKinlay. They fo und that exchange rates have violated the martingale property since th e inception of floating rates in 1973. Liu and He did not consider the joint implications of their tests, however. In this article, we reass ess the martingale hypothesis for exchange rates using the joint tests developed by Hochberg and by Richardson and Smith. Contrary to the fi ndings of Liu and He, the joint tests indicate that the martingale mod el worked quite well for exchange rates in the recent years of the flo ating-rate regime.