Testing the Validity of Exchange Rate Determination Approaches for Turkey

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 2002EMH for :11-2015 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