Feedback trading and autocorrelation interactions in the foreign exchange market: Further evidence

This paper tests for presence of feedback trading, asymmetric behavior and autocorrelation linkages in several industrial and emerging economies' exchange rates, with respect to the US dollar, as well as the Euro. The issue is examined via the means of a GARCH-augmented feedback model for the period of 1990 to 2003. The empirical results indicate presence of feedback trading and/or asymmetric behavior in both types of economies' exchange rates but absence of such behavior in the Euro. Presence of asymmetric behavior implies that market traders rely on central banks to intervene so they can realize short-term profits. Furthermore, evidence of volatility persistence in several exchange rates implies inefficiency in those markets. Finally, there are instances where the first-order autoregressive parameter is positive and statistically significant in the exchange rates of both industrial and emerging economies but not in the Euro. For the latter currency, lack of asymmetric behavior and feedback trading implies a credible currency in the eyes of foreign exchange traders. (c) 2005 Published by Elsevier B.V.