GARCH inadequacy for modelling exchange rates: empirical evidence from Latin America

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Abstract:

This article checks for the adequacy of using GARCH models in exchange rate series. Using the Hinich portmanteau bicorrelation test, we find that a GARCH formulation or any of its variants fails to capture the data generating process of the main Latin American exchange rates. Our results highlight the potential of having misleading public policy when estimates are based in GARCH types of models. This article also complements recent similar findings encountered in European and Asian economies.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840600707316

Affiliations: 1: Faculty of Economics and Business, Universidad del Desarrollo, Las Condes, Chile 2: Escuela de Negocios de Valparaíso, Universidad Adolfo lbañez, Santiago, Chile 3: Applied Research Laboratories, The University of Texas at Austin, Austin Texas, USA

Publication date: October 1, 2007

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