Long memory in exchange rates: international evidence

In this paper we test for the presence of fractional integration, or long memory, in the daily returns of exchange rates using ARFIMA(p,d,q) models. We consider 34 exchange rates against the US dollar (USD) covering the period April 1991 to April 2006. The results suggest that 17 exchange rates show strong evidence of long memory. This indicates that shocks to the exchange rates persist over a long period of time (this is stronger in emerging market economies). This also indicates that these markets are not stable, and hence they offer an opportunity to investors and traders to add some risk to their strategies. The lack of long memory in the daily returns of exchange rates supports the efficient market hypothesis (EMH). These findings are helpful to traders dealing with long dated assets.