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Quantile Threshold Effects in the Dynamics of the Dollar/Pound Exchange Rate

Author

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  • Galvao, Antonio F.
  • Montes-Rojas, Gabriel
  • Olmo, Jose

Abstract

This article employs threshold quantile autoregressive models to study the dynamics in the American dollar / British pound exchange rate. We investigate whether the documented carry trade strategies developed by international investors can be fundamented in an apparent existence of predictability in the exchange rate. We extend the literature by estimating a threshold quantile autoregressive model which enables us to analyze the entire conditional quantile process instead of only the conditional mean. Our results show evidence of important heterogeneity associated with the returns on the dollar/pound exchange rate. These features of the data supporting predictability for some regimes are found, particularly, at moderate quantiles. The investment opportunities, however, vanish for extreme regimes within these quantiles, and also for extreme quantiles where the returns on exchange rates seem to be uncorrelated.

Suggested Citation

  • Galvao, Antonio F. & Montes-Rojas, Gabriel & Olmo, Jose, 2009. "Quantile Threshold Effects in the Dynamics of the Dollar/Pound Exchange Rate," The Journal of Economic Asymmetries, Elsevier, vol. 6(2), pages 69-82.
  • Handle: RePEc:eee:joecas:v:6:y:2009:i:2:p:69-82
    DOI: 10.1016/j.jeca.2009.02.007
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    References listed on IDEAS

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    1. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    2. Richard H. Clarida & Lucio Sarno & Mark P. Taylor & Giorgio Valente, 2006. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1193-1224, May.
    3. Antonio F. Galvao Jr. & Gabriel Montesā€Rojas & Jose Olmo, 2011. "Threshold quantile autoregressive models," Journal of Time Series Analysis, Wiley Blackwell, vol. 32(3), pages 253-267, May.
    4. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
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    More about this item

    Keywords

    C14; C22; C32; C50; Nonlinear models; Quantile regression; Threshold models; Exchange rates;

    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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