Stochastic Exchange Rate Dynamics, Intervention Dynamics and the Market Efficiency Hypothesis

Emmanouil Drakonakis () and Stelios Kotsios ()
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Emmanouil Drakonakis: National and Kapodistrian University of Athens
Stelios Kotsios: National and Kapodistrian University of Athens

Computational Economics, 2025, vol. 65, issue 1, No 17, 463-481

Abstract: Abstract Since currency price fluctuations hinder economic activity, exchange rate dynamics have an effect on national economies. To have a proper exchange rate policy in place, these dynamics are essential for nations with a trade economy. This study presents and examines a distinctive stochastic dynamics exchange rate model (ESI) in order to address the challenges associated with predicting the behavior of participants in some complex economic systems, which might lead to the system’s collapse. To address the issue of ESI stability by central bank interventions (managed currency) in a specified target value, a target value technique is also provided and tested. Last but not least, we examine the noise traders’ role as a major source of market uncertainty as we look at the market efficiency hypothesis for the foreign exchange market (FX).

Keywords: Stochastic processes; Exchange rates; Central bank interventions; Market efficiency hypothesis (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10614-024-10581-w

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