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Efficient Market Hypothesis and the RMB-Dollar Rates: A Nonlinear Modeling of the Exchange Rate

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  • Hongxing Yao
  • Abdul Rashid Abdul Rahaman

Abstract

This paper uses a SETAR model to determine threshold(s) in the RMB/US$ exchange rate from 1981 to 2016 using monthly data. Also, it compares the forecast performance of the univariate nonlinear model to a univariate linear model. We further analyze the forecast performance of the SETAR model to a multivariate linear model, e.g., a Reduced-form VAR. In addition, the research assesses the claim by Boero and Marrocu (2002) that the root mean square error masks the superiority of the nonlinear models. We found five significant thresholds in the RMB/US$ exchange rate, and this result reflects five major episodes of policy reforms or structural changes in the renminbi exchange rates from the period 1981 to 2016. We also found that the univariate nonlinear model out performs both the univariate and multivariate linear models in predicting the exchange rate movements. This finding is consistent with the results in Kyei and Gyamfi (2016), Boero and Marrocu (2002), Krager and Kugler (1993), Peel and Speight (1994) and Chappell et al. (1996). Furthermore, we did not find any evidence of the root mean square error masking the superiority of the nonlinear model.

Suggested Citation

  • Hongxing Yao & Abdul Rashid Abdul Rahaman, 2018. "Efficient Market Hypothesis and the RMB-Dollar Rates: A Nonlinear Modeling of the Exchange Rate," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 150-160, February.
    • Handle: RePEc:ibn:ijefaa:v:10:y:2018:i:2:p:150-160
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    References listed on IDEAS

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    3. Clements, Michael P & Smith, Jeremy, 1999. "A Monte Carlo Study of the Forecasting Performance of Empirical SETAR Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 123-141, March-Apr.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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    6. Krager, Horst & Kugler, Peter, 1993. "Non-linearities in foreign exchange markets: a different perspective," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 195-208, April.
    7. Boero, Gianna & Marrocu, Emanuela, 2002. "The Performance of Non-linear Exchange Rate Models: A Forecasting Comparison," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 21(7), pages 513-542, November.
    8. Emmanuel Numapau Gyamfi & Kwabena A. Kyei, 2016. "Modeling Stock Market Returns under Self-exciting Threshold Autoregressive Model: Evidence from West Africa," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1194-1199.
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    Cited by:

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    2. Lorenzo Escot & Julio E. Sandubete & Łukasz Pietrych, 2023. "Detecting Structural Changes in Time Series by Using the BDS Test Recursively: An Application to COVID-19 Effects on International Stock Markets," Mathematics, MDPI, vol. 11(23), pages 1-18, December.

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    More about this item

    Keywords

    Self Exciting Threshold Auto-regression (SETAR); Reduced-form Vector Autoregression (VAR); exchange rates; root mean square error; Renminbi;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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