Higher Moments and Exchange Rate Behavior

This paper uses 15‐minute exchange rate returns data for the six most liquid currencies (i.e., the Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, and Swiss franc) vis‐à‐vis the United States dollar to examine whether a GARCH model augmented with higher moments (HM‐GARCH) perf...

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Published inThe Financial review (Buffalo, N.Y.) Vol. 54; no. 1; pp. 201 - 229
Main Authors Khademalomoom, Siroos, Narayan, Paresh Kumar, Sharma, Susan Sunila
Format Journal Article
LanguageEnglish
Published Knoxville Blackwell Publishing Ltd 01.02.2019
Subjects
American dollar
C58
F31
foreign exchange
Foreign exchange rates
G15
high frequency
higher moments
modeling
Stochastic models
trading strategy
Volatility
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Summary:This paper uses 15‐minute exchange rate returns data for the six most liquid currencies (i.e., the Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, and Swiss franc) vis‐à‐vis the United States dollar to examine whether a GARCH model augmented with higher moments (HM‐GARCH) performs better than a traditional GARCH (TG) model. Two findings are unraveled. First, the inclusion of odd/even moments in modeling the return/variance improves the statistical performance of the HM‐GARCH model. Second, trading strategies that extract buy and sell trading signals based on exchange rate forecasts from HM‐GARCH models are more profitable than those that depend on TG models.
Bibliography:Journal of Banking and Finance
The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Department of Treasury and Finance, Victoria, Australia.
This paper is original and has not been submitted elsewhere for publication. It is a chapter of the first author's PhD thesis undertaken at Deakin University, Melbourne, Australia. Earlier versions of this paper were presented at the Centre for Financial Econometrics
2015 conference on “Recent Developments in Financial Econometrics” at Deakin University, Geelong, Australia. We acknowledge helpful comments and suggestions provided by conference participants, seminar participants at Deakin University, and Professors Jonathan Batten and Niklas Wagner. Helpful comments and suggestions from the Editor (Dr. Richard Warr) and anonymous reviewers of this journal are duly acknowledged.
ISSN:0732-8516
1540-6288
DOI:10.1111/fire.12171