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Mean Aversion in and Persistence of Shocks to the US Dollar: Evidence from Nine Foreign Currencies

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  • Samih Antoine Azar

    (Faculty of Business Administration & Economics, Haigazian University, Mexique Street, Kantari, Beirut, Lebanon)

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    Abstract

    This paper analyses the statistical behavior of the US dollar, against nine different currencies, over the float period, with a monthly data set. The martingale hypothesis is rejected for all currencies. However, all currencies have a unit root. There is overwhelming evidence for significant positive serial correlation and ARCH effects in the logged series and in the changes of the logs. In addition, the nine logged series are characterized by structural breaks in both the intercept and the slope. Surprisingly, when the changes of the logs are considered, these do not show up any structural breaks, although the sample period has witnessed more than one political, social, and economic regime. All the nine logged currencies are well described by a low-order ARIMA model, with a parcimonious GARCH specification of the conditional variance. These ARIMA models imply mean aversion, rather than mean reversion, and high persistence of shocks. Mean aversion and persistence of shocks are formally tested and found to be significant for all nine currencies. This justifies the title of the paper.

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    Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

    Volume (Year): 3 (2013)
    Issue (Month): 3 ()
    Pages: 723-733

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    Handle: RePEc:eco:journ1:2013-03-15
    Contact details of provider: Web page: http://www.econjournals.com

    Keywords: US dollar; mean aversion; persistence of shocks; market efficiency; martingale; structural breaks; ARIMA; GARCH;

    Find related papers by JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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