The subject of count oning the step in rate has attracted scrutiny and an over charter body of work has been done in the past. A volumed body of work has sought to accurately forecast the exchange rates. A study of the work done shows that there is a count regarding whether the exchange rates follow a ergodic walk or can be modelled. A debate also persists whether the structural models, linear, non-linear time series models best forecast the exchange rate.
2.1 EMH and the Random Walk TheoryThe concept of efficient merchandise was introduced first by Fama et al.,(1969) who defines an efficient market as a market which ?rapidly adjusts to any saucy selective information?. though the rapid adjustment to mod information is an important fragment of an efficient market; it is not the only one. A new definition was purge forward by Fama (1991) that states that the asset prices amply reflect all available information. This is a stronger definition of the EMH. This means that it is impossible to outperform the market consistently because currency prices already incorporate and reflect all relevant information. Grossman & Stiglitz (1980) concludes that if the information was ?fully reflected? in the asset prices, there will be no financial inducement to obtain that information. Since, the information is dear(p); there must be a financial incentive to obtain the information.
A more realistic definition is put forward by Jensen (1978) who defines market efficiency as ?A market is efficient with respect to information set ?t (represents the information available at time t) if it is impossible to stain economic profits by trading on the footing of information set ?t?. The competition to take improvement of any mismatched exchange rate is intense. So when new information about mismatched rates comes out, investors rush to take advantage of it and...
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