Abstract
Previous studies have shown that a random walk model is an appropriate time series model for explaining exchange rate time series. This analysis is based on the assumption that the variance of an exchange rate time series is homogeneous with respect to time. This paper shows that this assumption may be violated for exchange rate time series. The monthly exchange rate of German Deutschemark per U.S. dollar is considered. The data ranges from March 1973 to December 1984. The starting point roughly coincides with the beginning of the floating rate regime. It is seen that a non-linear model would be more appropriate than a linear model for explaining this exchange rate time series.
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