Which Random Walk Best Portrays the Dynamics of the Japanese Yen?

James J. Kung and E-Ching Wu

Australian Economic Papers, 2014, vol. 53, issue 3-4, 153-169

Abstract: type="main">

Previous empirical studies have, in general, found that a random walk provides an appropriate description of the exchange rate dynamics. What remains at issue is how the error term of the random walk should be parameterised. This study takes an entirely different approach to examining the exchange rate dynamics. Specifically, we employ the bootstrapping technique, coupled with two popular investment strategies, to investigate which of the following nine random walks best portrays the dynamics of the Japanese yen: a random walk whose error term is independent and identically distributed, four random walks whose error terms are ARCH-parameterised, and four random walks whose error terms are GARCH-parameterised. Using daily yen data from 1991 to 2010, our results show that, of the nine processes, the GARCH(1,1) random walk best portrays the yen over the said period.

Date: 2014
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