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A Non-linear Analysis of Excess Foreign Exchange Returns

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  • Coakley, Jerry
  • Fuertes, Ana-Maria

Abstract

In this paper we explore the dynamics of US dollar excess foreign exchange returns for the G10 currencies and the Swiss franc, 1976-97. The non-linear framework adopted is justified by the results of linearity tests and a parametric bootstrap likelihood ratio statistic which indicate threshold effects or differential adjustment to small and large excess returns. Impulse response analysis suggests that the effect of small shocks to excess returns inside the no-arbitrage band exhibits most persistence. Large shocks outside the band decay most rapidly and also exhibit overshooting. These phenomena are explained in terms of noise trading strategies and transaction costs. Copyright 2001 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 69 (2001)
Issue (Month): 6 (December)
Pages: 623-42

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Handle: RePEc:bla:manchs:v:69:y:2001:i:6:p:623-42

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Cited by:
  1. Taylor, Mark P, 2003. "Is Official Exchange Rate Intervention Effective?," CEPR Discussion Papers 3758, C.E.P.R. Discussion Papers.
  2. Maria-Teresa Perez & Ana-Maria Fuertes & Jerry Coakley, 2001. "Numerical Issues in Threshold Autoregressive Modelling of Time Series," Working Papers wp01-09, Warwick Business School, Finance Group.
  3. Jordà, Òscar & Taylor, Alan M., 2012. "The carry trade and fundamentals: Nothing to fear but FEER itself," Journal of International Economics, Elsevier, vol. 88(1), pages 74-90.
  4. McMillan, David G., 2005. "Non-linear dynamics in international stock market returns," Review of Financial Economics, Elsevier, vol. 14(1), pages 81-91.
  5. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Testing for sign and amplitude asymmetries using threshold autoregressions," Journal of Economic Dynamics and Control, Elsevier, vol. 30(4), pages 623-654, April.
  6. Coakley, Jerry & Fuertes, Ana-Maria, 2001. "Border costs and real exchange rate dynamics in Europe," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 669-676, August.
  7. Sekioua, Sofiane H., 2006. "Nonlinear adjustment in the forward premium: evidence from a threshold unit root test," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 164-183.

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