A fractional cointegration var analysis of exchange rate dynamics |
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| Institution: | 1. University of Navarra, Pamplona, Spain;2. Bank of Lithuania, Vilnius, Lithuania;1. Department of Banking and Finance, Cheng Shiu University, Kaohsiung, Taiwan, ROC;2. Department of Finance, National Kaohsiung University of Science and Technology, Kaohsiung, Taiwan, ROC;3. Sales department, Paralink Networks, Inc., New Taipei City, Taiwan, ROC;1. Graduate School of Management, National Taiwan University of Science and Technology, Taiwan;2. Department of Risk Management and Insurance, National Chengchi University, Taiwan;3. School of Business, Central South University, China;4. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taiwan;1. Department of Business Administration, Fu Jen Catholic University, No. 510, Zhongzheng Rd., Xinzhuang Dist., New Taipei City 24205, Taiwan;2. Department of Business Administration, National Chin-Yi University of Technology, No. 57, Sec. 2, Zhongshan Rd., Taiping Dist., Taichung 41170, Taiwan;1. Department of Economics, University of Navarra, Pamplona, Spain;2. Department of Statistics, University of Ibadan, Nigeria;3. Department of Mathematics, Obafemi Awolowo University, Ile-Ife, Nigeria;1. Department of Finance and Economics, College of Business Administration, University of Sharjah, Sharjah 27272, United Arab Emirates;2. School of Business, University of the Sunshine Coast, Maroochydore DC, QLD 4558, Australia;3. School of Commerce, University of South Australia, Adelaide, SA 8001, Australia;4. Shanghai Lixin University of Commerce, Songjiang District, Shanghai, China |
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| Abstract: | In their seminal work, Baillie and Bollerslev (1994) carried out an analysis of deviations from the cointegrating relationship of seven important exchange rates. They suggested that the exchange rate series possess long memory and therefore such processes could be well described as fractionally integrated processes. Hence, the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons. In this work we analyze the cointegrating structure of five exchange rates to the US dollar, namely the British pound, the Euro, the Swedish Krona, the Canadian Dollar and the Swiss Franc. The series possess long memory and we show that they can be modeled through fractional integration. In fact, standard cointegration is rejected with the more traditional Johansen CVAR methodology. By using the recently introduced Fractionally Cointegrated VAR by Johansen and Nielsen (2012) we provide a cointegrating relationship taking into account fractional integration. |
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| Keywords: | Exchange rates Long memory Cointegration FCVAR model |
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