The multiscale causal dynamics of foreign exchange markets
نویسندگان
چکیده
This paper relies on wavelet multiresolution analysis to investigate the dependence structure and predictability of currency markets across different timescales. It explores the nature and direction of causality among the exchange rates with respect to the US dollar of the most widely traded currencies, namely Euro, Great Britain Pound and Japanese Yen. The timescale analysis involves the estimation of linear, nonlinear and spectral causal relationships of wavelet components and aggregate series as well as the investigation of their out-of-sample predictability. Moreover, this study attempts to probe into the micro-foundations of across-scale causal heterogeneity on the basis of trader behavior with different time horizons. The examined period starts from the introduction of the Euro and covers the dot-com bubble, the financial crisis of 2007–2010 and the Eurozone debt crisis. Technically, this paper presents an invariant discrete wavelet transform that deals efficiently with phase shifts, dyadic-length and boundary effects. It also proposes a new entropy-based methodology for the determination of the optimal decomposition level and a wavelet-based forecasting approach. Overall, there is no q We are grateful to the Editor Paul McNelis, an anonymous referee, Ramazan Gençay, Helmut Lütkepohl as well as seminar participants at various institutions for helpful comments and discussions. Stelios Bekiros also thanks the Department of Quantitative Economics at the University of Amsterdam (UvA), the Department of Economics and the MaxWeber Programme at the European University Institute (EUI), for having hosted his research. Earlier versions of this paper were presented at the UvA, the Netherlands Society for Statistics and Operations Research (VVS) and at the EUI. This research is supported by the Marie Curie Fellowship (FP7-PEOPLE-2011-CIG, N 303854) under the 7th European Community Framework Programme. The usual disclaimers apply. * Corresponding author. Tel.: þ39 055 4685916; fax: þ39 055 4685 902. E-mail addresses: [email protected], [email protected] (S. Bekiros), [email protected] (M. Marcellino). 1 Tel.: þ39 055 4685956; fax: þ39 055 4685 902.
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