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Testing for Neglected Nonlinearity in Weekly Foreign Exchange Rates

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  • M. Shibley Sadique

    () (Department of Finance & Banking, University of Rajshahi, BANGLADESH)

Abstract

This study investigates the presence of neglected nonlinearity in weekly exchange rates of five countries in terms of Australian dollar. Three prominent nonlinear models from the ARCH family, such as the EGARCH, GARCH-M and EGARCH-M are fitted to the first differenced log of exchange rate series. The logs of the squared standardized residuals from the fitted models are tested for any leftover nonlinear structure using the BDS test. The nature of the leftover nonlinear dependence is identified using the Odd Product Moment Test of Hsieh (1991). Overall, the empirical evidence obtained in this study support the claim that the ARCH-type models cannot capture all the nonlinearities in financial asset returns.

Suggested Citation

  • M. Shibley Sadique, 2011. "Testing for Neglected Nonlinearity in Weekly Foreign Exchange Rates," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 77-88, June.
  • Handle: RePEc:bap:journl:110306
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    References listed on IDEAS

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    1. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, pages 125-143.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. Hsieh, David A., 1992. "A nonlinear stochastic rational expectations model of exchange rates," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 235-250, June.
    4. Ravi Vaidyanathan & Tim Krehbiel, 1992. "Does the S&P 500 futures mispricing series exhibit nonlinear dependence across time?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(6), pages 659-677, December.
    5. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, pages 83-106.
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    8. Bonser-Neal, Catherine & Roley, V. Vance & Sellon, Gordon H., 2000. "The effect of monetary policy actions on exchange rates under interest-rate targeting," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 601-631, October.
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    More about this item

    Keywords

    Neglected nonlinearity; ARCH-type models; Exchange rates;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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