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Efficiency in BRICS Currency Markets using Long-Spans of Data: Evidence from Model-Free Tests of Directional Predictability

Rangan Gupta () and Vasilios Plakandaras ()

No 201836, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we analyze the directional predictability in foreign exchange markets of Brazil, Russia, India, China and South Africa (i.e., the BRICS) using the quantilogram, which in turn, is a model-free econometric procedure involving a simple diagnostic statistic based on a sample correlation. Our analysis uses the longest possible available monthly data set covering the periods of 1812M01-2018M05, 1814M01-2018M05, 1822M07-2018M05, 1948M08-2018M05, and 1844M01-2018M05, respectively for the dollar-based exchange rates of the BRICS countries. We find that, barring the extreme phases of the currency markets, and around the median for India and South Africa, we do observe directional predictability, i.e., the efficient market hypothesis (EMH) is only accepted at these quantiles. The fact that predictability holds at certain parts of the unconditional distribution of exchange rate returns, capturing stages of the currency market, tend to support the so-called Adaptive Market Hypothesis (AMH).

Keywords: Correlogram; dependence; quantiles; efficiency; currency markets; BRICS (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C22 F31 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cis and nep-ore
Date: 2018-06
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