Higher Moments and Exchange Rate Behavior

29 Pages Posted: 8 Jan 2019

See all articles by Siroos Khademalomoom

Siroos Khademalomoom

Deakin University - Faculty of Business and Law

Paresh Kumar Narayan

Deakin University - School of Accounting, Economics and Finance

Susan Sharma

Deakin University; Deakin University; Deakin University

Date Written: February 2019

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.

Keywords: foreign exchange, high frequency, modeling, higher moments, trading strategy

JEL Classification: C5, C58, F31, G15

Suggested Citation

Khademalomoom, Siroos and Narayan, Paresh Kumar and Sharma, Susan, Higher Moments and Exchange Rate Behavior (February 2019). Financial Review, Vol. 54, Issue 1, pp. 201-229, 2019, Available at SSRN: https://ssrn.com/abstract=3311668 or http://dx.doi.org/10.1111/fire.12171

Siroos Khademalomoom (Contact Author)

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

Paresh Kumar Narayan

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

Susan Sharma

Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia

Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia

Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia

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