Non-Linear Exchange Rate Relationships: An Automated Model Selection Approach with Indicator Saturation

Josh Stillwagon ()

No 1405, Working Papers from Trinity College, Department of Economics

Abstract: This paper examines whether the explanatory power of exchange rate models can be improved by allowing for cross-country asymmetries and non-linear effects of fundamentals. Both appear to be crucial. The data set looks at the USD versus pound and yen exchange rates from 1982:07-2012:02, and bias-corrected automated model selection is conducted with indicator saturation. Several non-linear effects are significant at the 1% level including for exchange rate momentum and Taylor rule effects of fundamentals. In many cases, larger changes in fundamentals lead to changes in the exchange rate at an increasing rate. Additionally, most of the indicators present in the linear models are eliminated once allowing for non-linearities, suggesting some of the structural breaks and outliers found in previous work were an artifact of the misspecified linear functional form.

Keywords: Exchange Rates; determination puzzle; non-linearities; cross-country asymmetries; automated model selection; indicator saturation (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-10
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (1)

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http://www3.trincoll.edu/repec/WorkingPapers2014/WP14-05.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Non-linear exchange rate relationships: An automated model selection approach with indicator saturation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tri:wpaper:1405

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