Abstract:
The question of whether exchange rate markets are efficient or not, is directly
related to whether or not long memory is pr esent in the exchange rate changes.
Therefore, this paper explores the nature of the data generating processes of foreign
exchange rate LKR against the US Dollar (USD), (LKR/USD) by examining the long
memory properties of the LKR/USD return series based on econophysics models. In
this study, autocorrelation function and spectral density function are used as visual
test to inspect long memory of exchange rate returns. Further, parametric-ARFIMA
model, Semi-parametric test proposed by Geweke and Porter-Hudak, Local Whittle
estimator and non-parametric (R/S) test are employed as inferential tests to examine
the long memory properties of the LKR/USD using daily data for the period from
2005-01-03 to 2016-12-30. Kernel density of LKR/USD return series show peak
and fat tail postures. Visual inspection and inferential results reveal strong evidence
of long memory property in the daily LKR/USD exchange rate return. It indicates
that pricing by the market participants is not efficient. The results of this study have
policy implications for traders and investors in designing and implementing trading
strategies. It can also be helpful in predicting expected future return. Thus, the results
of this study should be useful to regulators, practitioners and investors.
