Working Paper

Non-monotonic long memory dynamics in black-market premia

Abstract: The dynamic response of Black market premia to domestic shocks is an important issue in the design and implementation of stabilization and reform programs. We use a vector autoregressive fractionally integrated model to provide new evidence on the dynamics of the official and Black market exchange rates. We show that the official and Black market exchange rates in Hungary are cointegrated with a negative fractional order ofintegration in the cointegrating residuals. The new empirical finding means that the cointegrating residuals are positively autocorrelated in the short run due to autoregressive dynamics, but are negatively autocorrelated in the long run. The rich and complex dynamics of the premia suggests the existence of what we call long memory non-monotonicity.

Keywords: Foreign exchange rates; Vector autoregression;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1995

Number: 1995-003