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

See all articles by Sergio Souza

Sergio Souza

Government of the Federative Republic of Brazil - Central Bank of Brazil

Benjamin M. Tabak

FGV/EPPG

Daniel O. Cajueiro

Universidade de Brasília (UnB)

Date Written: March 2008

Abstract

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

Suggested Citation

Souza, Sergio and Tabak, Benjamin M. and Cajueiro, Daniel O., Long-Range Dependence in Exchange Rates: The Case of the European Monetary System (March 2008). International Journal of Theoretical and Applied Finance, Vol. 11, Issue 2, pp. 199-223, 2008, Available at SSRN: https://ssrn.com/abstract=1515631

Sergio Souza

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Benjamin M. Tabak (Contact Author)

FGV/EPPG ( email )

SGAN Av. L2 Norte - Quadra 602 - Módulos A, B e C
Brasília, Rio de Janeiro 70830-051
Brazil

Daniel O. Cajueiro

Universidade de Brasília (UnB) ( email )

Campus Universitário Darcy Ribeiro
Asa Norte
Brasília, Distrito Federal 70910-900
Brazil

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