Testing for Nonlinear Dependence in Daily Foreign Exchange Rates

The purpose of this article is to investigate whether daily changes in five major foreign exchange rates contain any nonlinearities. Although the data contain no linear correlation, evidence indicates the presence of substantial nonlinearity in a multiplicative rather than additive form. Further examination reveals that a generalized autoregressive conditional heteroskedasticity model can explain a large part of the nonlinearities for all five exchange rates.