Abstract

This study explores the time-series properties and predictability of intraday movements in the Taiwan exchange rates with respect to its most important trading partner, the United States, using the EGARCH-M model along with the generalized error distribution (GED), allows for variable kurtosis in the data. The study (1) examines whether the Martingale hypothesis of no predictability remains appropriate at the intraday level; (2) tests whether the more general GED, which can account for varying degrees of skewness and kurtosis, provides a better representation of the stochastic behavior of the intraday Taiwan exchange rate series than the normal distribution; (3) addresses the issue of whether knowledge of the trading hour provides incremental information that is useful for forecasting intraday movements of the exchange rate; (4) investigates whether intraday movements in the new Taiwan dollar (NT) are positively (or negatively) influenced by their conditional standard deviations; and (5) tests for the presence of asymmetric volatility in the intraday data. In our experiment, the Martingale hypothesis is rejected at the intraday level and the distribution of the intraday NT/U.S. dollar exchange rate is found to be highly leptokurtic relative to the normal distribution. The GED appears to provide a better characterization of the leptokurtic distribution than the normal distribution. Also, knowledge of the trading hour is shown to provide incremental information that is useful for forecasting intraday movements of the exchange rate. There is evidence to suggest that the conditional standard deviation negatively influences future intraday movements of the NT/U.S. dollar exchange rate. Only weak evidence for asymmetric volatility in the intraday data is found.

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