Abstract
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.
Highlights
Introduction and Statement of the ProblemThe most important financial market in an economy is the foreign exchange market
If the six foreign exchange rates follow a lognormal distribution, stated as a random walk in log levels, this implies that the change in logs is identically, independently and normally distributed
This paper studies the probability distribution of daily foreign exchange rates in Lebanon for the recent five years
Summary
The most important financial market in an economy is the foreign exchange market. That is why a lot of studies and research have been done in order to find ways to understand the market. One of these studies led to the Efficient Market Hypothesis (EMH). The Efficient Market Hypothesis states that a market is efficient if all available information is used to set the price of a financial asset. The concept of Efficient Market Hypothesis has been developed independently by Samuelson (1965) and Fama (1965, 1970) in the 1960s. The first is weak form efficiency whereby only past information is available. The second is the semi-strong form which extends the information set to all public information The last is the strong form efficiency which extends the information set further to include public information, and private information, typically the information held by corporate insiders, such as officers and executives of the corporation
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