TESTING THE VALIDITY OF EXCHANGE RATE DETERMINATION APPROACHES FOR TURKEY

Year 2016, Volume: 38 Issue: 2, 111 - 128, 25.12.2016

Mehmet Çağrı Gözen , Selçuk Koç , Tezcan Abasız

https://doi.org/10.14780/muiibd.281331

Cited By: 1

Abstract

This paper investigates the two of the exchange rate determination approaches for Turkey. Efficient

Market Hypothesis (EMH) in weak form is tested by using overnight, weekly, monthly, quarterly and

yearly forward exchange rates and spot exchange rates for Turkish Lira/US Dollar and Turkish Lira/

Euro. Weekly data is used to test EMH for 2002:11-2015:06 period. Other approach empirically tested

in this paper is Purchasing Power Parity (PPP) Hypothesis for Turkey. Whether or not this approach

is valid is determined with monthly data covering the 2002:11-2015:03 period. In this study, LP and

LM unit root tests with two structural breaks is applied as method in addition to KPSS and Augmented

Dickey-Fuller unit root tests. Our findings don’t support the evidence that PPP hypothesis is valid but

support that market efficiency in weak form is valid.

Keywords

Exchange Rate Determination, Purchasing Power Parity, Efficient Market Hypothesis, ADF Unit Root Test, LM Unit Root Test

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