Wavelet Multiresolution Analysis of High-Frequency Asian FX Rates, Summer 1997

58 Pages Posted: 5 Nov 2000  

Cornelis A. Los

Alliant International University - California School of Management and Leadership; University of California at Irvine - The Paul Merage School of Business; EMEPS Associates

Jeyanthi Karuppiah

Nanyang Technological University (NTU) - Centre for Research in Financial Services (CREFS)

Date Written: October 2000

Abstract

FX pricing processes are nonstationary and their frequency characteristics are time-dependent. Most do not conform to geometric Brownian motion, since they exhibit a scaling law with a Hurst exponent between zero and 0.5 and fractal dimensions between 1.5 and 2. This paper uses wavelet multiresolution analysis, with Haar wavelets, to analyze the nonstationarity (time-dependence) and self-similarity (scale-dependence) of intra-day Asian currency spot exchange rates. These are the ask and bid quotes of the currencies of eight Asian countries (Japan, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, Thailand), and of Germany for comparison, for the crisis period May 1, 1998 - August 31, 1997, provided by Telerate (U.S. dollar is the numeraire). Their time-scale dependent spectra, which are localized in time, are observed in wavelet based scalograms. The FX increments can be characterized by the irregularity of their singularities. This degrees of irregularity are measured by homogeneous Hurst exponents. These critical exponents are used to identify the fractal dimension, relative stability and long term dependence of each Asian FX series. The invariance of each identified Hurst exponent is tested by comparing it at varying time and scale (frequency) resolutions. It appears that almost all FX markets show anti-persistent pricing behavior. The anchor currencies of the D-mark and Japanese Yen are ultra-efficient in the sense of being most anti-persistent. The Taiwanese dollar is the most persistent, and thus unpredictable, most likely due to administrative control. FX markets exhibit these non-linear, non-Gaussian dynamic structures, long term dependence, high kurtosis, and high degrees of non-informational (noise) trading, possibly because of frequent capital flows induced by non-synchronized regional business cycles, rapidly changing political risks, unexpected informational shocks to investment opportunities, and, in particular, investment strategies synthesizing interregional claims using cash swaps with different duration horizons.

Keywords: foreign exchange markets, anti-persistence, long-term dependence, multi-resolution analysis, wavelets, time-scale analysis, scaling laws, irregularity analysis, randomness, Asia

JEL Classification: C22, F31, G14, G15, O53

Suggested Citation

Los, Cornelis A. and Karuppiah, Jeyanthi, Wavelet Multiresolution Analysis of High-Frequency Asian FX Rates, Summer 1997 (October 2000). AFA 2001 New Orleans; Adelaide University, School of Economics Working Paper No. 00-6. Available at SSRN: https://ssrn.com/abstract=245744 or http://dx.doi.org/10.2139/ssrn.245744

Cornelis A. Los (Contact Author)

Alliant International University - California School of Management and Leadership ( email )

10455 Pomerado Road
Rm. 119
San Diego, CA 92131-1799
United States
858-635-4783 (Phone)
858-635-4455 (Fax)

HOME PAGE: http://management.alliant.edu/

University of California at Irvine - The Paul Merage School of Business ( email )

SB1
Irvine, CA 92697-3125
United States

EMEPS Associates ( email )

Escondido, CA 92029
United States
760-294-0255 (Phone)
858-635-4783 (Fax)

Jeyanthi Karuppiah

Nanyang Technological University (NTU) - Centre for Research in Financial Services (CREFS)

Nanyang Avenue
Singapore, 639798
Singapore

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