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Testing for Neglected Nonlinearity in Weekly Foreign Exchange Rates

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  • M. Shibley Sadique

    (Department of Finance & Banking, University of Rajshahi, BANGLADESH)

Abstract

This study investigates the presence of neglected nonlinearity in weekly exchange rates of five countries in terms of Australian dollar. Three prominent nonlinear models from the ARCH family, such as the EGARCH, GARCH-M and EGARCH-M are fitted to the first differenced log of exchange rate series. The logs of the squared standardized residuals from the fitted models are tested for any leftover nonlinear structure using the BDS test. The nature of the leftover nonlinear dependence is identified using the Odd Product Moment Test of Hsieh (1991). Overall, the empirical evidence obtained in this study support the claim that the ARCH-type models cannot capture all the nonlinearities in financial asset returns.

Suggested Citation

  • M. Shibley Sadique, 2011. "Testing for Neglected Nonlinearity in Weekly Foreign Exchange Rates," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 77-88, June.
    • Handle: RePEc:bap:journl:110306
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Neglected nonlinearity; ARCH-type models; Exchange rates;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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

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