A Double‐threshold GARCH Model for the French Franc/Deutschmark exchange rate

This paper combines and generalizes a number of recent time series models of daily exchange rate series by using a SETAR model which also allows the variance equation of a GARCH specification for the error terms to be drawn from more than one regime. An application of the model to the French Franc/Deutschmark exchange rate demonstrates that out‐of‐sample forecasts for the exchange rate volatility are also improved when the restriction that the data it is drawn from a single regime is removed. This result highlights the importance of considering both types of regime shift (i.e. thresholds in variance as well as in mean) when analysing financial time series. Copyright © 2000 John Wiley & Sons, Ltd.     

Bicorrelations and cross‐bicorrelations as non‐linearity tests and tools for exchange rate forecasting

This paper proposes and implements a new methodology for forecasting time series, based on bicorrelations and cross‐bicorrelations. It is shown that the forecasting technique arises as a natural extension of, and as a complement to, existing univariate and multivariate non‐linearity tests. The formulations are essentially modified autoregressive or vector autoregressive models respectively, which can be estimated using ordinary least squares. The techniques are applied to a set of high‐frequency exchange rate returns, and their out‐of‐sample forecasting performance is compared to that of other time series models. Copyright © 2001 John Wiley & Sons, Ltd.     

The performance of non‐linear exchange rate models: a forecasting comparison

In recent years there has been a considerable development in modelling non‐linearities and asymmetries in economic and financial variables. The aim of the current paper is to compare the forecasting performance of different models for the returns of three of the most traded exchange rates in terms of the US dollar, namely the French franc (FF/$), the German mark (DM/$) and the Japanese yen (Y/$). The relative performance of non‐linear models of the SETAR, STAR and GARCH types is contrasted with their linear counterparts. The results show that if attention is restricted to mean square forecast errors, the performance of the models, when distinguishable, tends to favour the linear models. The forecast performance of the models is evaluated also conditional on the regime at the forecast origin and on density forecasts. This analysis produces more evidence of forecasting gains from non‐linear models. Copyright © 2002 John Wiley & Sons, Ltd.     

The real exchange rate,fiscal policy and the role of wealth an analysis of equilibrium in a monetary union

This paper is concerned with the adjustment processes within a potential European monetary union and looks in particular at permanent asymmetric shocks that require an adjustment in a country's (or region's) real exchange rate. We first consider some of the implications of EMU and the question of asymmetries within the European economy. The presence of asymmetries and, in particular, different institutional structures in labour markets is a potential source of tension within a union and it could make a union difficult to sustain. However, automatic adjustment processes will be at work within a monetary union as a result of changes in relative price levels, which change real exchange rates, and also as a result of changes in wealth stocks. We use our econometric world model, NIGEM, to investigate the effects of asymmetric fiscal expansions and real exchange rate misalignments within a monetary union. In order to quantify the effects of such permanent asymmetric shocks we have introduced wealth into our model. Our simulations suggest that the principal impact of the fiscal expansion on both output and the price level will occur within the country in which the expansion occurs. Short-term gains are crowded out in the medium term, and while monetary union reduces crowding out in the short term, it increases the rate at which crowding out occurs thereafter. We also analyse the effects of real exchange rate misalignments and find that the processes of adjustment may be very protracted. This could cause strain on the union as adjustment costs are shared unequally.