A Variance Ratio Test of Random Walks in Foreign Exchange Rates of Developing Markets: Evidence From Six African Countries

Current literature reveals that tests of the random walk hypothesis (RWH) on financial prices have focused on major world financial markets. This paper presents results of variance ratio tests of random walks in foreign exchange rates of six African countries. For most currencies analyzed, the tests provide evidence for rejection of the RWH. The analysis provides rejections that are robust to heteroskedasticity and non normal disturbances. The rejections confirm the presence of autocorrelation in the exchange rate series and are consistent with Dornbusch’s overshooting and undershooting phenomenon of exchange rates.