Episodic Nonlinearity in Leading Global Currencies

Apostolos Serletis, Anastasios Malliaris, Melvin Hinich and Periklis Gogas

No 3-2010, DUTH Research Papers in Economics from Democritus University of Thrace, Department of Economics

Abstract: We perform non-linearity tests using daily data for leading currencies that include the Australian dollar, British pound, Brazilian real, Canadian dollar, euro, Japanese yen, Mexican peso, and the Swiss franc to resolve the issue of whether these currencies are driven by fundamentals or exogenous shocks to the global economy. In particular, we use a new method of testing for linear and nonlinear lead/lag relationships between time series, introduced by Brooks and Hinich (1999), based on the concepts of cross-correlation and cross-bicorrelation. Our evidence points to a relatively rare episodic nonlinearity within and across foreign exchange rates. We also test the validity of specifying ARCH-type error structures for foreign exchange rates. In doing so, we estimate Bollerslevs (1986) general- ized ARCH (GARCH) model and Nelsons (1988) exponential GARCH (EGARCH) model,using a variety of error densities [including the normal, the Student-t distribution, and the Generalized Error Distribution (GED)] and a comprehensive set of diagnostic checks. We apply the Brooks and Hinich (1999) nonlinearity test to the standardized residuals of the optimal GARCH/EGARCH model for each exchange rate series and show that the nonlinearity in the exchange rates is not due to ARCH-type e¤ects. This result has important implications for the interpretation of the recent voluminous literature which attempts to model fi nancial asset returns using this family of models.

Keywords: Global nancial markets; Currencies; Episodic nonlinearity; Conditional heteroskedasticity. (search for similar items in EconPapers)
JEL-codes: C22 C45 D40 G10 Q40 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-06-07
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Episodic Nonlinearity in Leading Global Currencies (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:duthrp:2010_003

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