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Long Memory and Volatility Dynamics in the US Dollar Exchange Rate

  • Guglielmo Maria Caporale
  • Luis A. Gil-Alana

This paper focuses on nominal exchange rates, specifically the US dollar rate vis-à-vis the Euro and the Japanese Yen at a daily frequency. We model both absolute values of returns and squared returns using long-memory techniques, being particularly interested in volatility modelling and forecasting given their importance for FOREX dealers. Compared with previous studies using a standard fractional integration framework such as Granger and Ding (1996), we estimate a more general model which allows for dependence not only at the zero but also at other frequencies. The results show differences in the behaviour of the two series: a long-memory cyclical model and a standard I(d) model seem to be the most appropriate for the US dollar rate vis-à-vis the Euro and the Japanese Yen respectively.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 975.

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Length: 37 p.
Date of creation: 2010
Date of revision:
Handle: RePEc:diw:diwwpp:dp975
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  17. Luis A. Gil-Alana, 2006. "Fractional integration and structural breaks at unknown periods of time," Faculty Working Papers 16/06, School of Economics and Business Administration, University of Navarra.
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