Return Predictability: Evidence from Nigeria's Foreign Exchange Parallel Market

Using a simple method that is based on the likelihood ratio test of Dickey and Fuller (1981), we test for predictability of short run currency movements in Nigeria's foreign exchange parallel market. The intuition is that in an efficient market with unpredictable information arrival, asset prices should follow a martingale process over short-term intervals. We find that the market is not information-efficient with respect to past prices. Therefore, short-term returns are predictable.