Martingale property of exchange rates and central bank interventions

Abstract

This article uses the variance ratio-based multiple comparison test and the Richardson–Smith Wald test procedures to test for the martingale property of daily exchange rates of seven major currencies vis-à-vis the U.S. dollar. To allow for the possibility that exchange rates are not governed by a single process throughout the float, the test statistics are calculated and plotted for fixed-length moving subsample windows rather than being applied to the full sample. The results show that exchange rates do not always follow the martingale process. During the times of coordinated central bank interventions, exchange rates deviate from the martingale property.