An examination of nonlinear dependence in exchange rates,using recent methods from chaos theory |
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| Institution: | 1. School of Mining Engineering, UNSW Sydney, Sydney, NSW 2052 Australia;2. Australian Centre for Sustainable Mining Practices, School of Mining Engineering, UNSW Sydney, Australia;3. School of Computer Science and Engineering, UNSW Sydney, Australia;4. UNSW Business School, UNSW Sydney, Australia;5. Caltech/NASA Jet Propulsion Laboratory, NASA, USA;6. School of Mining Engineering, UNSW Sydney, Australia;1. Presad Research Group, Facultad de Ciencias, Universidad de Valladolid, Valladolid E47011, Spain;2. Borda Research Unit and Multidisciplinary Institute of Enterprise (IME), Universidad de Salamanca, Salamanca E37007, Spain;3. Borda Research Unit, Presad Research Group and IME, Universidad de Salamanca, Salamanca E37007, Spain |
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| Abstract: | Interest in the relevance of nonlinear dynamics to finance and economics has spurred the evolution of new ways to analyze time series data. Tests for chaos, based on a metric approach which measures spatial correlations, led to the development of the correlation dimension test for chaos and the BDS test for nonlinearity. More recently, a topological method has been introduced into the scientific literature which employs a simple qualitative test for chaos that is adaptable to the characteristics of financial data. A quantitative version is also presented here. Conflicting evidence exists about the presence of chaotic behavior in exchange-rate data. The qualitative topological test does not support evidence of a chaotic generating mechanism in these series. The quantitative form finds nonlinear dependence and is a useful diagnostic to determine the adequacy of ARCH-type models for this nonlinear structure. |
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