GARCH inadequacy for modelling exchange rates: empirical evidence from Latin America |
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| Authors: | Claudio A Bonilla Rafael Romero-Meza Melvin J Hinich |
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| Institution: | 1. Faculty of Economics and Business , Universidad del Desarrollo , Av. La Plaza 700, Las Condes, Chile cbonilla@udd.cl;3. Escuela de Negocios de Valparaíso , Universidad Adolfo lba?ez , Av. Diagonal Las Torres 2640, Santiago, Chile;4. Applied Research Laboratories , The University of Texas at Austin , P.O. Box 8029, Austin Texas, USA |
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| Abstract: | This article checks for the adequacy of using GARCH models in exchange rate series. Using the Hinich portmanteau bicorrelation test, we find that a GARCH formulation or any of its variants fails to capture the data generating process of the main Latin American exchange rates. Our results highlight the potential of having misleading public policy when estimates are based in GARCH types of models. This article also complements recent similar findings encountered in European and Asian economies. |
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