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Multiscale foreign exchange dynamics in India: A wavelet approach

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  • Padha, Vimarsh
  • Chaubal, Aditi

Abstract

Exchange rates impact economies through agents with different investment horizons, highlighting the need to analyze multiscale dynamics. This study investigates volatility spillovers, chaos, persistence, and long memory among four major Indian Rupee (INR) exchange rate returns—against the US Dollar (USD), Euro (EUR), British Pound (GBP), and Japanese Yen (JPY)—from January 1999 to February 2023, using a wavelet-based framework. We find significant volatility spillovers and persistent long-term effects between INR-USD and INR-JPY, as well as between INR-EUR and INR-JPY. Evidence of mean reversion and absence of long memory is observed at short scales (2 to 32 days) across all exchange rate pairs, consistent with the Heterogeneous Market Hypothesis (HMH); however, this relationship reverses when returns are analyzed at the aggregate level. This suggests that inefficiencies may exist at very short horizons but tend to be corrected in the longer run. Moreover, we find evidence of deterministic chaos at medium- and long-term scales. The forecast performance of traditional linear against hybrid machine learning models varies across different rates and scales. Overall, our findings suggest that scale-specific strategies are needed in the Indian exchange rate market to account for heterogeneous multiscale properties, ensure effective risk management, and capture the adaptive behavior of market participants.

Suggested Citation

  • Padha, Vimarsh & Chaubal, Aditi, 2025. "Multiscale foreign exchange dynamics in India: A wavelet approach," International Economics, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:inteco:v:184:y:2025:i:c:s2110701725000757
    DOI: 10.1016/j.inteco.2025.100652
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    JEL classification:

    • 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
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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