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Nonlinear dynamics in foreign exchange excess returns: Tests of asymmetry

  • Emekter, Riza
  • Jirasakuldech, Benjamas
  • Snaith, Sean M.
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    This paper examines the nonlinear dynamic behaviors in foreign exchange excess returns of eight currencies. We applied the BDS test and two other nonlinear statistical techniques, the Markov chain, and time reversibility tests to characterize the exchange rate returns dynamics. The results from the BDS test provide strong evidence of nonlinear dependence on the British pound, the Singapore dollar, the South African rand, and the Swedish krone. The Markov chain test shows evidence of a non-random walk and positive serial dependence in all currencies except for the British pound, the Canadian dollar, and the Swiss franc. Lastly, evidence of time irreversible and asymmetric dynamic behavior is found in seven currencies with the exception of the Canadian dollar. The results indicate that the asymmetry in the Singapore dollar, the South African rand, and the Swiss franc is due to nonlinearity in the functional form as opposed to non-Gaussian innovations.

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    Article provided by Elsevier in its journal Journal of Multinational Financial Management.

    Volume (Year): 19 (2009)
    Issue (Month): 3 (July)
    Pages: 179-192

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    Handle: RePEc:eee:mulfin:v:19:y:2009:i:3:p:179-192
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