Long-Range Dependence in Exchange Rates: The Case of the European Monetary System
International Journal of Theoretical and Applied Finance, Vol. 11, Issue 2, pp. 199-223, 2008
Posted: 30 Nov 2009
Date Written: March 2008
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.
Keywords: Long memory, exchange rates, R/S analysis, financial crisis
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