Official Intervention in the Foreign Exchange Market and the Random Walk Behavior of Exchange Rates

Official intervention in the foreign exchange rate market can prevent the exchange rate from behaving as a random walk. Since central banks have routinely intervened in the foreign exchange market, empirical tests should reject the random walk hypothesis. A number of alternative statistical tests are employed to examine this hypothesis. The empirical results reveal that all but the Dickey-Fuller tests flatly reject the random walk hypothesis for all currencies tested. Given the low statistical power of the Dickey-Fuller tests, the empirical evidence points toward a rejection of the random walk hypothesis.