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Long-Range Dependence In Exchange Rates: The Case Of The European Monetary System

Author

Listed:
  • SERGIO R. S. SOUZA

    (Banco Central do Brasil, SBS Quadra 3, Bloco B, Ed. Sede, 9 andar, Brasilia, DF, 70074-900, Brazil)

  • BENJAMIN M. TABAK

    (Banco Central do Brasil, SBS Quadra 3, Bloco B, Ed. Sede, 9 andar, Brasilia, DF, 70074-900, Brazil;
    Universidade Católica de Brasília, Brazil)

  • DANIEL O. CAJUEIRO

    (Universidade Católica de Brasília, Brazil)

Abstract

In this work we measure the evolution of the long-range dependence phenomenon of returns and volatilities of nominal British exchange rates (British pound against US dollar) futures contracts negotiated on the Chicago Mercantile Exchange from 1986 to 2004. The measurement employs the R/S classic analysis, Detrended Fluctuation Analysis and Generalized Hurst exponents, upon a 1008-observation window, which moves along the data. We obtain as a result, the effects of the 1992 European financial crisis on the measurements of the long-range dependency phenomenon. After the crisis the returns of this futures contract showed no signs of the long-range memory, which existed before the crisis. The volatility presented moderate long-range memory the whole time. We also test for long-memory in European currencies inside the European Monetary System and find evidence of moderate long memory, which suggests that being inside the EMS increases predictability.

Suggested Citation

  • Sergio R. S. Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2008. "Long-Range Dependence In Exchange Rates: The Case Of The European Monetary System," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 199-223.
  • Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:02:n:s0219024908004774
    DOI: 10.1142/S0219024908004774
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    4. Benjamin R Auer, 2016. "Pure return persistence, Hurst exponents and hedge fund selection – A practical note," Journal of Asset Management, Palgrave Macmillan, vol. 17(5), pages 319-330, September.
    5. Benjamin Rainer Auer, 2018. "Are standard asset pricing factors long-range dependent?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 66-88, January.
    6. Anju Bala & Kapil Gupta, 2020. "Examining The Long Memory In Stock Returns And Liquidity In India," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 9(3), pages 25-43.
    7. Gajardo, Gabriel & Kristjanpoller, Werner D. & Minutolo, Marcel, 2018. "Does Bitcoin exhibit the same asymmetric multifractal cross-correlations with crude oil, gold and DJIA as the Euro, Great British Pound and Yen?," Chaos, Solitons & Fractals, Elsevier, vol. 109(C), pages 195-205.
    8. Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series 143, Central Bank of Brazil, Research Department.
    9. Marcelo Y. Takami & Benjamin M. Tabak, 2007. "Evaluation of Default Risk for The Brazilian Banking Sector," Working Papers Series 135, Central Bank of Brazil, Research Department.
    10. Gilneu F. A. Vivan & Benjamin M. Tabak, 2007. "A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives," Working Papers Series 133, Central Bank of Brazil, Research Department.
    11. da Silva Filho, Antônio Carlos & Maganini, Natália Diniz & de Almeida, Eduardo Fonseca, 2018. "Multifractal analysis of Bitcoin market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 512(C), pages 954-967.
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    14. Maganini, Natália Diniz & Da Silva Filho, Antônio Carlos & Lima, Fabiano Guasti, 2018. "Investigation of multifractality in the Brazilian stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 497(C), pages 258-271.

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