Title: An approximate entropy approach to examine the non-linear dependence in daily Indian exchange rates

Authors: Manish Kumar

Addresses: IREVNA-A Division of CRISIL, The Oval, 10 & 12, Venkat Narayan Road, T. Nagar, Chennai 600017, India

Abstract: The purpose of the study is to examine whether the returns and volatility for Indian exchange rates possess non-linear dependence. Furthermore, an attempt is made through a rolling-window approach to check whether non-linear dependence is time-varying. The study employs approximate entropy statistics to examine the non-linear dependence. We also estimate the Tsay statistics to test for non-linearity. The empirical results provide the evidence of strong non-linear dependence in the Indian exchange rate returns and volatility and also that is time-varying. The results also suggest that the GARCH model, which has been used in the study, is misspecified. The evidence of non-linearity has serious implications for asset pricing, risk management and policy making.

Keywords: exchange rates; ARIMA; GARCH; nonlinearity; approximate entropy; India; nonlinear dependence; asset pricing; risk management; policy making.

DOI: 10.1504/IJMEF.2011.040925

International Journal of Monetary Economics and Finance, 2011 Vol.4 No.3, pp.309 - 325

Received: 27 Sep 2010
Accepted: 28 Nov 2010
Published online: 26 Jun 2011 *

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