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Cointegration Analysis Of The Foreign Exchange Rate Pairs

Author

Listed:
  • Mária Bohdalová

    (Comenius University, Bratislava, Slovakia)

  • Michal Greguš

    (Comenius University, Bratislava, Slovakia)

Abstract

Due to certain economic factors, Hungary and Poland—the two Central European (CE) countries—have not successfully adopted the Euro currency. We aim to investigate the dependency of the two CE currencies, HUF and PLZ, against the USD and the linking mechanism between them. Cointegration analysis is commonly used as a common econometric technique for evaluating such efficiency.In this article, we discuss the cointegration analysis of the selected foreign exchange (FX) rate pairs. Using bivariate error correction model (ECM), we investigate spot FX rate pairs of HUF/USD and PLZ/USD. The results from ECM are used in impulse response model for prediction of the new equilibrium after the exogenous shocks affecting the processes at time t.We have found that HUF reacts more closely with the change in USD and that HUF and PLZ are very unlikely to be cointegrated. Nonetheless, we have found the period when both spot exchange rates are weekly cointegrated, which was after August 2011. Although contributions are low, the analytical results are still statistically significant for other researches to be conducted with fractal analysis of these FX rates.

Suggested Citation

  • Mária Bohdalová & Michal Greguš, 2014. "Cointegration Analysis Of The Foreign Exchange Rate Pairs," CBU International Conference Proceedings, ISE Research Institute, vol. 2(0), pages 147-153, July.
    • Handle: RePEc:aad:iseicj:v:2:y:2014:i:0:p:147-153
    DOI: 10.12955/cbup.v2.497
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    More about this item

    Keywords

    cointegrationECM; FX rates; impulse response model;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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