Random walk hypothesis in exchange rate reconsidered

Hsin-Min Lu and Chia-Shang J. Chu
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Hsin-Min Lu: University of Arizona, Tucson, Arizona, USA, Postal: University of Arizona, Tucson, Arizona, USA
Chia-Shang J. Chu: National Taiwan University and Polaris Research Institute Taipei, Taiwan, Postal: National Taiwan University and Polaris Research Institute Taipei, Taiwan

Journal of Forecasting, 2006, vol. 25, issue 4, pages 275-290

Abstract: An econometric model for exchange rate based on the behavior of dynamic international asset allocation is considered. The capital movement intensity index is constructed from the adjustment of a fully hedged international portfolio. Including this index as an additional explanatory variable helps to explain the fluctuation of the exchange rate and predict better than the competing random walk model. Supporting empirical evidence is found in Germany-USA, Japan-USA, Singapore-USA and Taiwan-USA exchange markets.  Copyright © 2006 John Wiley & Sons, Ltd.

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