Open Economies Review

, Volume 23, Issue 2, pp 337–357 | Cite as

Episodic Nonlinearity in Leading Global Currencies

  • Apostolos SerletisEmail author
  • Anastasios G. Malliaris
  • Melvin J. Hinich
  • Periklis Gogas
Research Article


We perform non-linearity tests using daily data for leading currencies that include the Australian dollar, British pound, Brazilian real, Canadian dollar, euro, Japanese yen, Mexican peso, and the Swiss franc to resolve the issue of whether these currencies are driven by fundamentals or exogenous shocks to the global economy. In particular, we use a new method of testing for linear and nonlinear lead/lag relationships between time series, introduced by Brooks and Hinich (J Empir Finance 20:385–404, 1999), based on the concepts of cross-correlation and cross-bicorrelation. Our evidence points to a relatively rare episodic nonlinearity within and across foreign exchange rates. We also test the validity of specifying ARCH-type error structures for foreign exchange rates. In doing so, we estimate Bollerslev’s (J Econom 31:307–327, 1986) generalized ARCH (GARCH) model and Nelson’s (1988) exponential GARCH (EGARCH) model, using a variety of error densities [including the normal, the Student-t distribution, and the Generalized Error Distribution (GED)] and a comprehensive set of diagnostic checks. We apply the Brooks and Hinich (1999) nonlinearity test to the standardized residuals of the optimal GARCH/EGARCH model for each exchange rate series and show that the nonlinearity in the exchange rates is not due to ARCH-type effects. This result has important implications for the interpretation of the recent voluminous literature which attempts to model financial asset returns using this family of models.


Global financial markets Currencies Episodic nonlinearity Conditional heteroskedasticity 

JEL Classification

C22 C45 D40 G10 Q40 



We thank the Editor, George S. Tavlas, and two anonymous referees for comments that greatly improved the paper. We are also thankful to Joko Mulyadi for valuable research assistance in collecting the data.


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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • Apostolos Serletis
    • 1
    Email author
  • Anastasios G. Malliaris
    • 2
  • Melvin J. Hinich
    • 3
  • Periklis Gogas
    • 4
  1. 1.Department of EconomicsUniversity of CalgaryCalgaryCanada
  2. 2.Department of EconomicsLoyola University of ChicagoChicagoUSA
  3. 3.Department of Government and EconomicsThe University of Texas at AustinAustinUSA
  4. 4.Department of International Economic Relations and DevelopmentDemocritus University of ThraceKomotiniGreece

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