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A Non‐Linear Analysis of Excess Foreign Exchange Returns
Author(s) -
Coakley Jerry,
Fuertes AnaMaria
Publication year - 2001
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00274
Subject(s) - economics , econometrics , excess return , arbitrage , liberian dollar , statistic , impulse response , differential (mechanical device) , foreign exchange , monetary economics , physics , financial economics , statistics , mathematics , paleontology , mathematical analysis , context (archaeology) , finance , biology , thermodynamics
In this paper we explore the dynamics of US dollar excess foreign exchange returns for the G10 currencies and the Swiss franc, 1976–97. The non‐linear framework adopted is justified by the results of linearity tests and a parametric bootstrap likelihood ratio statistic which indicate threshold effects or differential adjustment to small and large excess returns. Impulse response analysis suggests that the effect of small shocks to excess returns inside the no‐arbitrage band exhibits most persistence. Large shocks outside the band decay most rapidly and also exhibit overshooting. These phenomena are explained in terms of noise trading strategies and transaction costs.