Asymmetric over- and undershooting of major exchange rates: Evidence from quantile regressions

- Temporal dependence of major currency rates.
- Quantile regressions and tests for the equality of cross-quantile effects.
- US dollar appreciations tend to feature positive dependence on past returns.
- US dollar depreciations tend to feature negative dependence on past returns.
- Results point to asymmetric exchange rate over- and undershooting.

This paper uses quantile regression techniques to investigate the temporal dependence patterns of major exchange rates around the globe. Specifically, we estimate quantile autoregressive models for daily exchange rate returns of the USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CHF and USD/CAD exchange rates between 1999 and 2014. Testing for the equality of cross-quantile-effects, we reveal substantial state-dependence in the return dynamics. In particular, we find that large US dollar appreciations tend to exhibit positive dependence on past returns, whereas large US dollar depreciations tend to exhibit negative dependence on past returns. Around central return quantiles, however, there is virtually no evidence for significant temporal dependence. Exceptions from this pattern are only apparent for the USD/JPY and the USD/CHF exchange rate. Theoretically, our results point to the presence of over- and undershooting in terms of asymmetric exchange rate adjustment to previous day information.