Behaviour of the Foreign Exchange Rates of BRICS: Is it Chaotic?

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Published: Jan 19, 2018
DOI: https://doi.org/10.5750/jpm.v11i2.1247
Keywords:
Exchange Rate Random Walk Chaos Lyapunov Exponent Correlation Dimension Surrogate Series

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Sharad Nath Bhattacharya
Indian Institute of Management Shillong
Mousumi Bhattacharya
Indian Institute of Management Shillong
Basav Roychoudhury
Indian Institute of Management Shillong

Abstract

The article focuses on the behaviour of foreign exchange rates of BRICS countries in reference to US dollar with special emphasis on examining presence of nonlinear dependence and deterministic chaos. The findings did not indicate random walk behaviour in the returns for all exchange rates and performance of GARCH as well as EGARCH models are reasonably good in capturing the conditional volatility. Further evidences suggest existence of nonlinear dependence and we compute Maximal Lyapunov Exponent and Correlation Dimension test with multiple surrogate series which confirms the chaotic nature of the exchange rates for all countries under study except for South Africa. The findings support short run predictability in exchange rates while long run predictions are unlikely to be successful. The chaotic nature of the foreign exchange market calls for newer intervention mechanism by the Central Bank of the respective countries to limit the exchange rate volatility.

Article Details

Issue
Vol. 11 No. 2 (2017)
Section
Articles

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