SPECTRAL TESTS OF THE MARTINGALE HYPOTHESIS FOR EXCHANGE-RATES

A new family of spectral shape tests was proposed recently by Durlauf (1991) for testing the martingale hypothesis. Unlike the widely used v ariance ratio test, spectral shape tests are consistent against all st ationary non-white-noise alternatives from the martingale null. In thi s paper we examine the finite sample properties of the spectral shape tests and find that the tests have good size and power properties even for small samples. We apply the tests to examine the martingale hypot hesis for five major currencies vis-h-vis the US dollar for the period 1974-89. The results indicate that most currencies violate the martin gale hypothesis. It appears that some rejections are due to long-memor y influences.