ABSTRACT
Although the EM H does not imply that asset prices need necessarily follow random walks (see Figure 10.1 and the surrounding discus sion), researchers have nevertheless continued to argue that the EM H implies that exchange rates should obey a random walk process such as1
and, furtherm ore, that the random walk model gives a good empirical representation of the exchange rate. Thus, Mussa (1979) argues that in general ‘the natural logarithm of the spot exchange rate follows approximately a random walk’. It thus seems worth examining in a little more detail whether the random walk model does have any theoretical and empirical support. In this section we pull together some of the points made previously as to why exchange rates need not follow random walks and then present some empirical evidence on the relationship.
