Testing the Random Walk Hypothesis in Pakistan's Forex Market: An Analysis of Major Currency Dynamics

Authors

  • Safdar Amin, Zahoor Ul Haq, Rooman Ali Shah

Abstract

The forex market has a profound impact at the marco economic level and because if its importance it is the central position in policy making decisions. In this article, we analyzed the random walk behaviour in the Pakistani market by taking the Yen (Japanese), Euro (Europe), Dollar (US) and Pound (UK) c. This study investigates the stationarity and dynamic relationships among four major currencies: Yen, Euro, US Dollar and Pound for the years 2001-2023. Applying the Phillips-Perron (PP) test, Augmented Dickey-Fuller (ADF) and Vector Auto-Regression (VAR) model, this research investigates the variability, stationary status and co-movements of these currencies. The empirical findings suggest that the stability of these two currencies is quite low when compared to the stability of the US Dollar which holds high autoregressive characteristics; the Euro and the Pound are more significantly unpredictable, and react sensitively to changes in the economic and geopolitical climate. The Yen which people believe to be a shield for the global volatilities does have a sensitivity towards such events. Thus, policy recommendations of this study are to minimize volatility, governments and central banks should pay attention to stabilising the key macroeconomic indicators. Further, the study suggests that the investors and corporations should undertake hedging positions amid to the shift in currencies. The future researchers should study effects of emerging market currencies; effects of digital currencies on forex markets; and effects of disruptions in global trade on currencies.

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Published

2024-09-30

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Articles