Official Intervention in the Foreign Exchange Market and the Random Walk Behavior of Exchange Rates

Ghassem A. Homaifar () and Joachim Zietz
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Ghassem A. Homaifar: Middle Tennessee State University, Department of Economics and Finance, Postal: 1301 East Main Street, Murfreesboro TN 37132-0001 - USA, http://www.mtsu.edu/

Economia Internazionale / International Economics, 1995, vol. 48, issue 3, 359-373

Abstract: Official intervention in the foreign exchange rate market can prevent the exchange rate from behaving as a random walk. Since central banks have routinely intervened in the foreign exchange market, empirical tests should reject the random walk hypothesis. A number of alternative statistical tests are employed to examine this hypothesis. The empirical results reveal that all but the Dickey-Fuller tests flatly reject the random walk hypothesis for all currencies tested. Given the low statistical power of the Dickey-Fuller tests, the empirical evidence points toward a rejection of the random walk hypothesis.

Date: 1995
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