Testing for Non-Linearity in the Foreign Currency Futures Market

University of Wales, Bangor, Research Paper No. RP 97/27

Posted: 13 Mar 2007

See all articles by Wan Mansor Mahmood

Wan Mansor Mahmood

Universiti Teknologi MARA (UiTM)

Stuart McLeay

University of Sussex; The University of Sydney

Abstract

In this paper, the issue of nonlinearity in foreign currency futures markets is examined. Daily returns are found to be linear independent but nonlinear dependent. That is, they are correlated through their second moment. However, when the BDS test is applied, the results are inconclusive as the null hypothesis of i.i.d is not rejected in some cases but rejected in others. This rejection of i.i.d in the returns and filtered returns series arises solely from the variance of the process as suggested by the third moment test. As such, GARCH(1,1) models are fitted to all the return series and the corresponding standardized residuals are tested for i.i.d behavior. It is shown that the model brings about some improvement in that nonlinear dependence in the return series is reduced considerably.

Keywords: linear dependent, nonlinearity, currency futures, GARCH

JEL Classification: G13, G14

Suggested Citation

Wan Mahmood, Wan Mansor and McLeay, Stuart, Testing for Non-Linearity in the Foreign Currency Futures Market. University of Wales, Bangor, Research Paper No. RP 97/27, Available at SSRN: https://ssrn.com/abstract=965973

Wan Mansor Wan Mahmood (Contact Author)

Universiti Teknologi MARA (UiTM) ( email )

Sura Hujung
Dungun, Terengganu 23000
Malaysia
609 8403774 (Phone)
609 8403777 (Fax)

HOME PAGE: http://www.tganu.uitm.edu.my/

Stuart McLeay

University of Sussex ( email )

Falmer, Brighton BN1 9SL
United Kingdom

The University of Sydney ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
635
PlumX Metrics