Non-Linear Dependence in ASEAN-5 Foreign Exchange Rates: An Insight from a Battery of Non-Linearity Tests
The main purpose of this study is to provide a deeper insight into the non-linear generating mechanism in the ASEAN-5 exchange rate returns series. To achieve that end, the differing power of the non-linear tests against certain alternatives is utilized. Specifically, the BDS and Hinich bispectru...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2001
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/8289/1/FEP_2001_3_ir.pdf |
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| Summary: | The main purpose of this study is to provide a deeper insight into the non-linear
generating mechanism in the ASEAN-5 exchange rate returns series. To achieve that
end, the differing power of the non-linear tests against certain alternatives is utilized.
Specifically, the BDS and Hinich bispectrum tests are employed which provide
valuable information on the adequacy of the current framework of ARCH-type
models in capturing the non-linear dynamics in ASEAN-5 currencies.
Daily data is used in this study covering the period from 1 990 to March 200 1 . The
five ASEAN countries selected are Malaysia, Singapore, Thailand, Indonesia and the
Philippines.
The results from the BDS test indicate strong evidences of non-linearity in the
ASEAN-5 exchange rate series. However, this conveys little information on the
nature of the detected non-linearity since the BDS test has high power against vast
class of alternatives. Further application of the Hinich bispectrum test can provide
valuable non-linear identification information, in which the results reveal strong evidences against the adequacy of the ARCH-type models in explaining the nonlinear
dynamics in ASEAN-5 exchange rate series.
The evidences of non-linearity in ASEAN-5 currencies have profound implications on
the validity of weak-form market efficient hypothesis, model adequacy as well as the
pricing of future derivatives. Furthermore, the results might prompt economists or
policy makers to consider alternative policy advice based on models characterised by
non-linear dynamics. |
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