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Asymmetric over- and undershooting of major exchange rates: Evidence from quantile regressions

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  • Kuck, Konstantin
  • Maderitsch, Robert
  • Schweikert, Karsten

Abstract

This paper uses quantile regression techniques to investigate the temporal dependence patterns of major exchange rates around the globe. Specifically, we estimate quantile autoregressive models for daily exchange rate returns of the USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CHF and USD/CAD exchange rates between 1999 and 2014. Testing for the equality of cross-quantile-effects, we reveal substantial state-dependence in the return dynamics. In particular, we find that large US dollar appreciations tend to exhibit positive dependence on past returns, whereas large US dollar depreciations tend to exhibit negative dependence on past returns. Around central return quantiles, however, there is virtually no evidence for significant temporal dependence. Exceptions from this pattern are only apparent for the USD/JPY and the USD/CHF exchange rate. Theoretically, our results point to the presence of over- and undershooting in terms of asymmetric exchange rate adjustment to previous day information.

Suggested Citation

  • Kuck, Konstantin & Maderitsch, Robert & Schweikert, Karsten, 2015. "Asymmetric over- and undershooting of major exchange rates: Evidence from quantile regressions," Economics Letters, Elsevier, vol. 126(C), pages 114-118.
    • Handle: RePEc:eee:ecolet:v:126:y:2015:i:c:p:114-118
    DOI: 10.1016/j.econlet.2014.11.028
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    References listed on IDEAS

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    1. Koenker, Roger & Xiao, Zhijie, 2006. "Quantile Autoregression," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 980-990, September.
    2. Bera Anil K. & Galvao Antonio F. & Wang Liang, 2014. "On Testing the Equality of Mean and Quantile Effects," Journal of Econometric Methods, De Gruyter, vol. 3(1), pages 47-62, January.
    3. Frenkel, Jacob A. & Rodriguez, Carlos A., 1980. "Exchange Rate Dynamics and Overshooting Hypothesis," Foerder Institute for Economic Research Working Papers 275323, Tel-Aviv University > Foerder Institute for Economic Research.
    4. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    5. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
    6. Baur, Dirk G., 2013. "The structure and degree of dependence: A quantile regression approach," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 786-798.
    7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    Cited by:

    1. Bošnjak Mile & Novak Ivan & Vlajčić Davor, 2021. "Market Efficiency of Euro Exchange Rates and Trading Strategies," Naše gospodarstvo/Our economy, Sciendo, vol. 67(2), pages 10-19, June.
    2. Jiang, Yong & Ren, Yi-Shuai & Narayan, Seema & Ma, Chao-Qun & Yang, Xiao-Guang, 2022. "Heterogeneity dependence between oil prices and exchange rate: Evidence from a parametric test of Granger causality in quantiles," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    3. Kuck, Konstantin & Maderitsch, Robert, 2019. "Intra-day dynamics of exchange rates: New evidence from quantile regression," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 247-257.

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    More about this item

    Keywords

    Informational efficiency; Quantile regression; State-dependence; Foreign exchange;
    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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