Structural Breaks and Long Memory Property in Korean Won Exchange Rates: Adaptive FIGARCH Model
Journal of East Asian Economic Integration, Vol. 15, No. 2, Summer 2011
28 Pages Posted: 30 Aug 2013
Date Written: March 15, 2011
This paper explores the issue of structural breaks and long memory property in the conditional variance process of the Korean exchange rates. To analyze the above in detail, this paper examines the dynamics of the structural breaks and the long memory in the conditional variance process of the Korean exchange returns by using the daily KRW-USD and KRW-JPY exchange rates for the period from 2000 through 2007. In particular, this paper employs the Adaptive FIGARCH model of Baillie and Morana (2009) which account for the structural breaks and the long memory property together. This paper also finds that the new Adaptive FIGARCH model outperforms the usual FIGARCH model of Baillie et al. (1996) when the structural breaks are present and that the long memory property in the conditional variance process of the Korean exchange returns is significantly reduced after the structural breaks are accounted for. Thus, these results suggest that the upward biased long memory property observed in the conditional variance process of the Korean exchange returns could partially have been imparted as a result of neglecting the structural breaks.
Keywords: Daily Korean foreign exchange rates, FIGARCH model, Adaptive FIGARCH model, Long memory property, Structural breaks
JEL Classification: C15, C22, G1
Suggested Citation: Suggested Citation