Long memory in Rupee-Dollar exchange rate: An empirical study

Abstract

The Exchange rate policy of the Government has attempted to make the Indian Rupee more market driven though earlier at time the central intervened in the market to maintain stability of the exchange rate. This study uses last 13 years data to find out if there exists any long memory process in the INR-US dollar Exchange Rate. The Classical R/S analysis as well as Variance Ratio Tests have been conducted in the data to figure out the results. The stationarity condition have been tested using ADF and Phillip - Perron tests and it has been observed that the return series is stationary and has no evidence of ARCH using White's ARCH test. The normality tests on the daily exchange rate returns for the last one-decade or so indicate the need to explore the application of non-linear modeling techniques while understanding exchange rate behaviour. But we come to see that the results from the persistence tests are split. The variance test clearly implies that there exists only shortterm memory in the market returns as given by study above and the pattern is also not clearly established. However, the R/S analysis does give indications of long-term memory but with noise. In either case, analysis shows that the movement of exchange rate does not follow a random movement.