IDEAS home Printed from https://ideas.repec.org/a/eee/japwor/v23y2011i2p79-85.html
   My bibliography  Save this article

Examining nonlinear dynamics of exchange rates and forecasting performance based on the exchange rate parity of four Asian economies

Author

Listed:
  • Lin, Jeng-Bau
  • Liang, Chin-Chia
  • Yeh, Ming-Liang

Abstract

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear dynamic behavior of exchange rate deviations based on the exchange rate parity (ERP) theory in four Asian economies: Japan, South Korea, Taiwan and Singapore. In this study, quarterly data from 1978 Q1 through 2007 Q4 are analyzed. The empirical results indicate that the deviations in the exchange rate of all four countries reject the null of linearity. The rate deviations in the Japanese and Korean cases exhibit a dynamic and smoothly symmetric ESTAR type process, while those in the Taiwanese and Singaporean cases match the smoothly asymmetric LSTAR type with respect to depreciating and appreciating regimes. These nonlinear characteristics can be explained by the existence of heterogeneous behavior and asymmetric information among economic agents. Furthermore, the estimation results of a nonlinear least squares (NLS) regression indicate that most of the parameter estimates are significant at the 10 percent level. The forecasted Japanese and Korean rate deviations in the ESTAR model are not superior to those from the AR model, possibly because these two countries experienced a serious fluctuation during the Asian financial crisis that occurred in 1997. However, based on the criterion of the RMSE, the forecasted Taiwanese and Singaporean rate deviations in the LSTAR model outperform those in the AR model.

Suggested Citation

  • Lin, Jeng-Bau & Liang, Chin-Chia & Yeh, Ming-Liang, 2011. "Examining nonlinear dynamics of exchange rates and forecasting performance based on the exchange rate parity of four Asian economies," Japan and the World Economy, Elsevier, vol. 23(2), pages 79-85, March.
  • Handle: RePEc:eee:japwor:v:23:y:2011:i:2:p:79-85
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0922142510000563
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January.
    2. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
    3. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
    4. Jeffrey A. Frankel & Andrew K. Rose, 1994. "A Survey of Empirical Research on Nominal Exchange Rates," NBER Working Papers 4865, National Bureau of Economic Research, Inc.
    5. Ivan Paya & Ioannis A. Venetis & David A. Peel, 2003. "Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 421-437, September.
    6. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
    7. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 119-136, Suppl. De.
    8. Baillie, Richard T. & Selover, David D., 1987. "Cointegration and models of exchange rate determination," International Journal of Forecasting, Elsevier, vol. 3(1), pages 43-51.
    9. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    10. repec:lan:wpaper:3215 is not listed on IDEAS
    11. repec:lan:wpaper:3583 is not listed on IDEAS
    12. repec:lan:wpaper:3313 is not listed on IDEAS
    13. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845.
    14. Liew, Venus Khim-Sen & Baharumshah, Ahmad Zubaidi & Lau, Sie-Hoe, 2002. "Forecasting performance of Logistic STAR exchange rate model: The original and reparameterised versions," MPRA Paper 511, University Library of Munich, Germany.
    15. McMillan, David G., 2005. "Non-linear dynamics in international stock market returns," Review of Financial Economics, Elsevier, vol. 14(1), pages 81-91.
    16. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    17. repec:lan:wpaper:3217 is not listed on IDEAS
    18. David O. Cushman, 2000. "The failure of the monetary exchange rate model for the Canadian-U.S. dollar," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 591-603, August.
    19. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    20. Ahmad Zubaidi Baharumshah & Venus Khim-Sen Liew & Evan Lau, 2003. "Nonlinear Mean Reversion in Real Exchange Rates: Evidence from the ASEAN-5," International Trade 0308001, EconWPA.
    21. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-1319, September.
    22. Groen, Jan J. J., 2000. "The monetary exchange rate model as a long-run phenomenon," Journal of International Economics, Elsevier, vol. 52(2), pages 299-319, December.
    23. 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.
    24. David A. Peel & Ioannis A. Venetis, 2005. "Smooth Transition Models and Arbitrage Consistency," Economica, London School of Economics and Political Science, vol. 72(3), pages 413-430, August.
    25. Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1387-1392.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:japwor:v:23:y:2011:i:2:p:79-85. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505557 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.