Nonlinearity and Fractional Integration in the US Dollar/Euro Exchange Rate

Abstract

This paper examines the nonlinear behavior and the fractional integration property of the US dollar/euro exchange rate over the period from January 1999 to August 2010 by extending the procedure of Peter M. Robinson (1994) to the case of nonlinearity. First, using the approach developed by Mehmet Caner and Bruce E. Hansen (2001), we investigate the possible presence of nonlinearity in the series through the estimation of a two-regime threshold autoregressive model. After finding nonlinearity, we also allow for disturbances to be fractionally integrated based on the different versions of Robinson (1994) tests. The findings show that the US dollar/euro exchange rate follows a stationary process with a weak evidence for long memory.

Key words: Nonlinear behavior, Long memory, Exchange rate.
JEL: C22.