Random Walks in Daily Foreign Exchange Rates? The Case of Lebanon (2010-2015)

Samih Antoine Azar, Tamar Kohilian


In most of the academic literature on asset prices, like equities or foreign exchange, the words weak-form efficiency and random walk are used interchangeably. This paper makes a distinction between these two concepts. Weak-form efficiency holds when price increments are independent and random. A random walk is more stringent: it requires that the probability distribution of price increments be identical and normal, in addition of being independent. As expected the null hypothesis of a random walk is rejected with force while the null of weak-form efficiency is not. This implies that linear filter rules, chartism, and technical analysis cannot produce abnormal profits. But this implies also that non-linear filter rules, chartism, and technical analysis can be profitable. This explains the reality of finding departments of technical analysis in most Lebanese banks. If the market experience of Lebanon is generalized to other countries this would explain why international banks also have such departments.

Full Text:



Andrews, D. W. K. (1993). Tests for parameter instability and structural change with unknown change point. Econometrica, 61. 821-856. http://dx.doi.org/10.2307/2951764

Andrews, D. W. K., & Ploberger, W. (1994). Optimal tests when a nuisance parameter is present only under the alternative. Econometrica, 62, 1383-1414. http://dx.doi.org/10.2307/2951753

Azar, S. (2013). The post-war behavior of foreign exchange rates in Lebanon. The Empirical Economics Letters, 12(9), 1005-1010.

Azar, S. (2014). Martingale in daily foreign exchange rates: evidence from six currencies against the Lebanese pound. Applied Economics and Finance, 1(1), 55-64.

Bai, J. (1997). Estimating multiple breaks one at a time. Econometric Theory, 13, 315-352. http://dx.doi.org/10.1017/S0266466600005831

Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66, 47-78. http://dx.doi.org/10.2307/2998540

Breitung, J. (2000). The local power of some unit root tests for panel data. In B. Baltagi (ed.), Advances in Econometrics, 15, Nonstationary Panels, Panel Cointegration, and Dynamic Panels, Amsterdam: JAI Press, 161-178. http://dx.doi.org/10.1016/S0731-9053(00)15006-6

Brock, W., Dechert, D., Sheinkman, J., & LeBaron, B. (1996). A test for independence based on the correlation dimension. Econometric Reviews, 15, 197-235. http://dx.doi.org/10.1080/07474939608800353

Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20, 249-272. http://dx.doi.org/10.1016/S0261-5606(00)00048-6

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427-431. http://dx.doi.org/10.2307/2286348. http://dx.doi.org/10.1080/01621459.1979.10482531

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 1057-1072. http://dx.doi.org/10.2307/1912517

Fama, E. (1965). The Behavior of Stock-Market Prices. Journal of Business, 38(1), 34-105.


Fama, E. (1970). Efficient capital markets: a review of theory and empirical work, Journal of Finance, 25(2), 383-417. http://dx.doi.org/10.2307/2325486. http://dx.doi.org/10.1111/j.1540-6261.1970.tb00518.x

Fama, E. (1991). Efficient capital markets II, Journal of Finance, 46(5), 1575-1617. http://dx.doi.org/10.1111/j.1540-6261.1991.tb04636.x

Hadri, K. (2000) Testing for stationarity in heterogeneous panel data. Econometric Journal, 3, 148-161.


Ibrahim, H., Long, Y., Ghani, H. A., & Salleh, S. I. M. (2011). Weak-form efficiency of foreign exchange market in the Organization for Economic Cooperation and Development countries: unit root test. International Journal of Business and Management, 6(6), 55-65. http://dx.doi.org/10.5539/ijbm.v6n6p55

Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74. http://dx.doi.org/10.1016/S0304-4076(03)00092-7

Kumar, A. S.., & Kamaiah, B. (2014). Efficient market hypothesis: some Evidences from emerging European forex markets. The Romanian Economic Journal, 52, 27-43.

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54, 1–3, 159–178.


Levin, A., Lin, C.F. & Chu, C. (2002) Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108, 1-24. http://dx.doi.org/10.1016/S0304-4076(01)00098-7

Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631-652. http://dx.doi.org/10.1111/1468-0084.61.s1.13

Mbululu, D., Auret, C. J., & & Chiliba, L. (2013). Do exchange rates follow random walks? A variance ratio test of the Zambian foreign exchange market; Southern African Business Review, 17(2), 45-62.

Mohamed, M., & Shakila, M. A. (2014). Study on weak-form efficiency of foreign exchange markets of developing economies: some India evidence. International Journal of Management, 6(1), 331-342.

Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346. http://dx.doi.org/10.1093/biomet/75.2.335

Pukthuanthong-Le, K., & Lee T., (2008) Weak-Form Efficiency in Currency Markets, Financial Analysts Journal, 64(3), 31-52. http://dx.doi.org/10.2469/faj.v64.n3.5

Rossi, B. (2006) Are exchange rates really random walks? Some evidence robust to parameter instability. Macroeconomic dynamics, 10(1), 20-38. http://dx.doi.org/10.1017/s1365100506050085

Samuelson, P. A. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial Management Review, 6(2), 41-49.

Wickremasinghe, G. B. (2004). Efficiency of foreign exchange markets: A developing country perspective. Available at SSRN 609285. http://dx.doi.org/10.2139/ssrn.609285

DOI: https://doi.org/10.11114/aef.v2i3.927


  • There are currently no refbacks.

Paper Submission E-mail: aef@redfame.com

Applied Economics and Finance    ISSN 2332-7294 (Print)   ISSN 2332-7308 (Online)

Copyright © Redfame Publishing Inc.

To make sure that you can receive messages from us, please add the 'redfame.com' domain to your e-mail 'safe list'. If you do not receive e-mail in your 'inbox', check your 'bulk mail' or 'junk mail' folders.