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Long-Range Dependence in Exchange Rates: the case of the European Monetary System

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  • Sergio Rubens Stancato de Souza
  • Benjamin M. Tabak
  • Daniel O. Cajueiro

Abstract

In this work we measure the evolution of the long-range dependence phenomenon of returns and volatilities of nominal British exchange rates (British pound against US dollar) futures contracts negotiated on the Chicago Mercantile Exchange from 1986 to 2004. The measurement employs the R/S classic analysis, Detrended Fluctuation Analysis and Generalized Hurst exponents, upon a 1008-observation window, which moves along the data. We obtain as a result, the effects of the 1992 European financial crises on the measurements of the long-range dependency phenomenon. After the crisis the returns of this futures contract showed no signs of the long-range memory, which existed before the crisis. The volatility presented moderate long-range memory the whole time. We also test for long-memory in European currencies inside the European Monetary System and find evidence of moderate long memory, which suggests that being inside the EMS increases predictability.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps131.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 131.

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Date of creation: Jan 2007
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Handle: RePEc:bcb:wpaper:131

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Web page: http://www.bcb.gov.br/?english

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References

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Cited by:
  1. Alvarez-Ramirez, Jose & Rodriguez, Eduardo & Espinosa-Paredes, Gilberto, 2012. "Is the US stock market becoming weakly efficient over time? Evidence from 80-year-long data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5643-5647.
  2. Zhuang, Xiaoyang & Wei, Yu & Zhang, Bangzheng, 2014. "Multifractal detrended cross-correlation analysis of carbon and crude oil markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 399(C), pages 113-125.
  3. Abounoori, Esmaiel & Shahrazi, Mahdi & Rasekhi, Saeed, 2012. "An investigation of Forex market efficiency based on detrended fluctuation analysis: A case study for Iran," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(11), pages 3170-3179.
  4. Cao, Guangxi & Xu, Longbing & Cao, Jie, 2012. "Multifractal detrended cross-correlations between the Chinese exchange market and stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4855-4866.
  5. Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series 143, Central Bank of Brazil, Research Department.
  6. Ricardo Schechtman, 2007. "Joint Validation of Credit Rating PDs under Default Correlation," Working Papers Series 149, Central Bank of Brazil, Research Department.
  7. Marcelo Y. Takami & Benjamin M. Tabak, 2007. "Evaluation of Default Risk for The Brazilian Banking Sector," Working Papers Series 135, Central Bank of Brazil, Research Department.
  8. Gilneu F. A. Vivan & Benjamin M. Tabak, 2007. "A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives," Working Papers Series 133, Central Bank of Brazil, Research Department.

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