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Nonlinearities in Exchange‐Rate Dynamics: Evidence from Five Currencies, 1973–94

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  • MICHAEL BLEANEY
  • PAUL MIZEN

Abstract

Although exchange rates appear to follow a random walk when tested against linear alternatives, the null hypothesis of a random walk is rejected against a cubic alternative which embodies the intuition that the rate of mean‐reversion increases with distance from equilibrium. A possible theoretical foundation for such a model is suggested. The model is tested on bilateral real exchange rates between four major currencies, and on the real effective exchange rate of these four plus the Australian dollar. The cubic model consistently outperforms its linear counterpart and the results imply that real exchange rates are in fact stationary.

Suggested Citation

  • Michael Bleaney & Paul Mizen, 1996. "Nonlinearities in Exchange‐Rate Dynamics: Evidence from Five Currencies, 1973–94," The Economic Record, The Economic Society of Australia, vol. 72(216), pages 36-45, March.
    • Handle: RePEc:bla:ecorec:v:72:y:1996:i:216:p:36-45
    DOI: 10.1111/j.1475-4932.1996.tb02607.x
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    References listed on IDEAS

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    Cited by:

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    2. Rossen Anja, 2016. "On the Predictive Content of Nonlinear Transformations of Lagged Autoregression Residuals and Time Series Observations," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 236(3), pages 389-409, May.
    3. Domowitz, Ian & El-Gamal, Mahmoud A., 2001. "A consistent nonparametric test of ergodicity for time series with applications," Journal of Econometrics, Elsevier, vol. 102(2), pages 365-398, June.
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    5. Michael Bleaney, 2006. "Fundamentals And Exchange Rate Volatility," Discussion Papers 06/03, University of Nottingham, School of Economics.
    6. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
    7. I. A. Agaev & Yu. A. Kuperin, 2004. "Multifractal Analysis and Local Hoelder Exponents Approach to Detecting Stock Markets Crashes," Papers cond-mat/0407603, arXiv.org.

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