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A Non‐Linear Analysis of Excess Foreign Exchange Returns

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  • Jerry Coakley
  • Ana‐Maria Fuertes

Abstract

In this paper we explore the dynamics of US dollar excess foreign exchange returns for the G10 currencies and the Swiss franc, 1976–97. The non‐linear framework adopted is justified by the results of linearity tests and a parametric bootstrap likelihood ratio statistic which indicate threshold effects or differential adjustment to small and large excess returns. Impulse response analysis suggests that the effect of small shocks to excess returns inside the no‐arbitrage band exhibits most persistence. Large shocks outside the band decay most rapidly and also exhibit overshooting. These phenomena are explained in terms of noise trading strategies and transaction costs.

Suggested Citation

  • Jerry Coakley & Ana‐Maria Fuertes, 2001. "A Non‐Linear Analysis of Excess Foreign Exchange Returns," Manchester School, University of Manchester, vol. 69(6), pages 623-642, December.
    • Handle: RePEc:bla:manchs:v:69:y:2001:i:6:p:623-642
    DOI: 10.1111/1467-9957.00274
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    Cited by:

    1. David G. McMillan, 2003. "Non‐linear Predictability of UK Stock Market Returns," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 557-573, December.
    2. David G. McMillan, 2005. "Non‐linear dynamics in international stock market returns," Review of Financial Economics, John Wiley & Sons, vol. 14(1), pages 81-91.
    3. McMillan, David G., 2005. "Non-linear dynamics in international stock market returns," Review of Financial Economics, Elsevier, vol. 14(1), pages 81-91.
    4. Coakley, Jerry & Fuertes, Ana-Maria, 2006. "Testing for sign and amplitude asymmetries using threshold autoregressions," Journal of Economic Dynamics and Control, Elsevier, vol. 30(4), pages 623-654, April.
    5. Coakley, Jerry & Fuertes, Ana-Maria & Perez, Maria-Teresa, 2003. "Numerical issues in threshold autoregressive modeling of time series," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2219-2242, September.
    6. Coakley, Jerry & Fuertes, Ana-Maria, 2001. "Border costs and real exchange rate dynamics in Europe," Journal of Policy Modeling, Elsevier, vol. 23(6), pages 669-676, August.
    7. Sekioua, Sofiane H., 2006. "Nonlinear adjustment in the forward premium: evidence from a threshold unit root test," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 164-183.
    8. Taylor, Mark, 2003. "Is Official Exchange Rate Intervention Effective?," CEPR Discussion Papers 3758, C.E.P.R. Discussion Papers.

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