Higher moments and exchange rate behavior

Siroos Khademalomoom, Paresh Kumar Narayan, Susan Sunila Sharma

Research output: Contribution to journalArticleResearchpeer-review

7 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)201-229
Number of pages29
JournalThe Financial Review
Volume54
Issue number1
DOIs
Publication statusPublished - Feb 2019
Externally publishedYes

Keywords

  • C5
  • C58
  • F31
  • foreign exchange
  • G15
  • high frequency
  • higher moments
  • modeling
  • trading strategy

Cite this