MODELING EXCHANGE-RATE DYNAMICS - NEW PERSPECTIVES FROM THE FREQUENCY-DOMAIN

In this paper the dynamics of foreign exchange rates is sought to be s tudied via new frequency domain techniques. Stationarity properties of the rates are analysed via a unit root test as well as a test based o n the evolutionary spectrum. Linearity and Gaussianity are analysed vi a bispectral tests and compared with the more frequently employed time domain tests, such as the McLeod-Li and Tsay tests. Finally, an evalu ation of the out-of-sample forecasting properties for eight methods-Ra ndom Walk, ARMA, Bilinear, State dependent model, dynamic linear model , ARCH, GARCH, and Garch-in-mean-is made. The methods used here seem t o shed a great deal of light on hitherto neglected aspects of exchange rate dynamics.