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Working Paper 1995-003A

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"Non-Monotonic Long Memory Dynamics in Black-Market Exchange Rates."
by Michael J. Dueker, and Patrick K. Asea

The dynamic response of Black market premia to domestic shocks is an important issue in the design and implementation of stabilization and reform programs. We use a vector autoregressive fractionally integrated model to provide new evidence on the dynamics of the official and Black market exchange rates. We show that the official and Black market exchange rates in Hungary are cointegrated with a negative fractional order ofintegration in the cointegrating residuals. The new empirical finding means that the cointegrating residuals are positively autocorrelated in the short run due to autoregressive dynamics, but are negatively autocorrelated in the long run. The rich and complex dynamics of the premia suggests the existence of what we call long memory non-monotonicity.

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Category > Applied Econometrics
Category > Finance
Author > Michael J. Dueker