Tests of the Martingale Hypothesis for Foreign Currency Futures with Time-Varying Volatility

This paper tests the martingale hypothesis for daily and weekly rates of change of futures prices for five currencies. Daily data suggests evidence against the null for each currency. Trading day effects in foreign currency futures and spot prices introduce complicated day of the week patterns in futures prices. For this reason, we retest the martingale hypothesis using weekly data and reject the null for only one currency. For this currency, one interpretation is that of a time-varying risk premium.