True or spurious long memory in European non-EMU currencies
Thomas Walther , Tony Klein , Hien Pham Thu , Krzysztof Piontek
AbstractWe examine the Croatian Kuna, the Czech Koruna, the Hungarian Forint, the Polish Zloty, the Romanian Leu, and the Swedish Krona whether their Euro exchange rates volatility exhibits true or spurious long memory. Recent research reveals long memory in foreign exchange rate volatility and we confirm this finding for these currency pairs by examining the long memory behavior of squared residuals by means of the V/S test. However, by using the ICSS approach we also find structural breaks in the unconditional variance. Literature suggests that structural breaks might lead to spurious long memory behavior. In a refined test strategy, we distinguish true from spurious long memory for the six exchange rates. Our findings suggest that Czech Koruna and Hungarian Forint only feature spurious long memory, while the rest of the series have both structural breaks and true long memory. Lastly, we demonstrate how to extend existing models to jointly model both properties yielding superior fit and better Value-at-Risk forecasts. The results of our work help to avoid misspecification and provide a better understanding of the properties of the foreign exchange rate volatility
|Journal series||Research in International Business and Finance, ISSN 0275-5319, (15 pkt)|
|Publication size in sheets||0.65|
|Keywords in English||Conditional variance, Foreign exchange, GARCH, Spurious long memory, Value at-Risk|
|Publication indicators||= 7|
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