On Exchange Rate Predictability and Adaptive Market Hypothesis in South Africa

ABSTRACT

This study sets out to explore the predictability of global foreign exchange rates vis-à-vis the South African rand using daily nominal exchange rates from January 2010 to February 2018. The estimation techniques include automatic portmanteau test, wild bootstrap variance ratio test, Dominguez–Lobato test for martingale difference hypothesis, and generalized spectral tests. We investigate the time-varying predictability by employing the fixed-length rolling window approach. The full sample results indicate significant predictability of some exchange rates while some suggest no predictability. The rolling window approach established that all the foreign exchange markets go through episodes of significant predictability and episodes of unpredictability. The currency investment space is dynamic and that makes it imperative for market participants to be adaptable.

KEYWORDS:

• Exchange rates
• adaptive market hypothesis
• market efficiency
• return predictability
• martingale difference
• South Africa

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The G20 is an international forum formed in 1999. Membership includes governments and central bank governors from Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, the Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom, United States, and the European Union.

² BRICS is an abbreviation used to represent the association of five major emerging and newly industrialized economies: Brazil, Russia, India, China, and South Africa.

³ The rolling window approach has been applied in Urquhart (2017), Urquhart and McGroarty (2016), Charles, Darné, and Kim (2015), Charles et al. (2012), and others, whereas the fixed sub-sample approach has been applied in Urquhart and Hudson (2013), Zhou and Lee (2013), Salisu and Ayinde (2016), and others.

⁴ The currencies included are AUD (Australian dollar), BRL (Brazilian real), CAD (Canadian dollar), CNY (Chinese yuan), EUR (European euro), GBP (British pound), HKD (Hong Kong dollar), INR (Indian rupee), JPY (Japanese yen), MXN (Mexican peso), NGN (Nigerian naira), RUB (Russian rouble), SGD (Singaporean dollar), USD (United States dollar), and XOF (CFA franc). Apart from NGN and XOF that were included to represent the Anglophone and Francophone blocks in Africa, the other currencies are in the BIS list of most traded currencies. See Bank of International Settlements (2016) for the ranks in terms of volume of daily transactions.