Testing for martingale difference hypothesis with structural breaks: Evidence from Asia–Pacific foreign exchange markets

Abstract

This study tests for martingale difference hypothesis (MDH) in nine selected Foreign Exchange (FX) markets from Asia–Pacific countries. Its main contributions to the literature include: (i) it adopts recent techniques in both the Autocorrelation based and Spectrum based tests for MDH, namely; the Wild Bootstrap Automatic Variance Ratio test by Kim (2009) and the Wild Bootstrap Generalized Spectral test by Escanciano and Velasco (2006); (ii) it determines structural breaks endogenously for all the returns series using Perron (2006) unit root test with structural break, and (iii) based on the Perron results, it obtains two sub-samples and thereafter tests for MDH. Empirical result from this study shows that FX market efficiency could be inconsistent over time due to changes in policies and events. Thus, a preliminary test for the presence significant structural break may be necessary when testing for MDH.

Keywords

• Martingale difference hypothesis (MDH)
• Structural breaks
• Asia–Pacific
• FX market