An approximate entropy approach to examine the non-linear dependence in daily Indian exchange rates. (27th June 2011)

• Record Type: Journal Article
• Authors: Kumar, Manish
• Is Part Of: International journal of monetary economics and finance. Volume 4:Number 3(2011)
• Page Start: 309
• Page End: 325
• Publication Date: 2011-06-27
• Subjects: exchange rates -- ARIMA -- GARCH -- nonlinearity -- approximate entropy -- India -- nonlinear dependence -- asset pricing -- risk management -- policy making; Monetary policy -- Periodicals; Finance -- Periodicals; Economics -- Mathematical models -- Periodicals; 332.4
• Languages: English
• ISSNs: 1752-0479

Abstract

The purpose of the study is to examine whether the returns and volatility for Indian exchange rates possess non-linear dependence. Furthermore, an attempt is made through a rolling-window approach to check whether non-linear dependence is time-varying. The study employs approximate entropy statistics to examine the non-linear dependence. We also estimate the Tsay statistics to test for non-linearity. The empirical results provide the evidence of strong non-linear dependence in the Indian exchange rate returns and volatility and also that is time-varying. The results also suggest that the GARCH model, which has been used in the study, is misspecified. The evidence of non-linearity has serious implications for asset pricing, risk management and policy making.