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Capturing asymmetry in real exchange rate with quantile autoregression

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  • Mauro S. Ferreira

    (Cedeplar-UFMG)

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    Abstract

    Quantile autoregression is used to explore asymmetries in the adjustment process of pair wise real exchange rate between the Italian lire, French franc, Deutsch mark, and the British pound. Based on the best specification for each quantile we construct predicted conditional density functions which guided us to identify two sources of asymmetry: 1) dispersion depends on the conditioned value of the real exchange rate, i.e., “conditional” heterokedasticity; 2) the probability of increases and falls also changes according to the conditioned value, i.e., there is higher probability for the real exchange rate to appreciate (depreciate) given the currency is depreciated (appreciated).We only verified strong heterokedasticity in relations among the lire, franc, and mark, which was resolved by estimating quadratic autoregressive model for some quantiles. Relations involving the pound presented stable but higher dispersion indicating larger probability of wider oscillation.

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    Bibliographic Info

    Paper provided by Cedeplar, Universidade Federal de Minas Gerais in its series Textos para Discussão Cedeplar-UFMG with number td306.

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    Length: 25 pages
    Date of creation: Apr 2007
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    Handle: RePEc:cdp:texdis:td306

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    Keywords: exchange rate; quantile autoregression; unit root; asymmetry;

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