An Analysis of Exchange Rates

Wen-Den CHEN
H. C. LI
Joseph McCARTHY
Coleen PANTALONE

Keywords

wavelet analysis, exchange rates, causality detection

Abstract

The objective of this study is to investigate the distributions of and relationships between returns on a sample of eight different exchange rates. Given substantial evidence of kurtosis and skewness in the returns, a stable distribution is employed to describe returns and volatility (squared returns). Additionally, wavelet analysis is used to investigate the local correlation in time-frequency space of the exchange rates data. Wavelet analysis is useful in analyzing nonstationary data and in its ability to reveal causality.