Labuan Bulletin
OF INTERNATIONAL BUSINESS & FINANCE
Labuan Bulletin of International Business & Finance 1(2), 2003, 79-93
ISSN 1675-7262
EPISODIC NON-LINEARITY AND NON-STATIONARITY
IN ASEAN EXCHANGE RATES RETURNS SERIES
Kian-Ping Lima∗, Melvin J. Hinichb and Venus Khim-Sen Liewa
a Labuan School of International Business and Finance, Universiti Malaysia Sabah
b Applied Research Laboratories, University of Texas at Austin
Abstract
A method proposed by Hinich and Patterson (1995) is employed in this study to
examine the stability of the non-linear dependency structures underlying the exchange
rates returns series of four ASEAN countries- Indonesia (IDR), the Philippines
(PHP), Singapore (SGD) and Thailand (THB). The bicorrelation test results reveal the
episodic and transient nature of these non-linear dependencies, which suggest that
they are not persistent enough for investors to benefit from it. By transforming the
returns into a set of binary data, the extended test procedure demonstrates that, while
the GARCH-type models are commonly applied to financial time series such as
exchange rates, they cannot provide an adequate characterization for the underlying
process of IDR, PHP and THB bilateral exchange rates. Further investigation reveals
that the violation of the covariance stationarity assumption as required by the
GARCH process is due to the presence of episodic non-stationarity in the data. Given
the prevalence of these episodic transient features across financial markets in the
world, there is the need for researchers to take into account these salient features in
their model construction.
Keywords: GARCH; Non-linearity; Non-stationarity; Correlations; Bicorrelation;
ASEAN foreign exchange markets.
∗ Corresponding author: Kian-Ping Lim, Labuan School of International Business and Finance,
Universiti Malaysia Sabah, P.O. Box 80594, 87015 F.T. Labuan, Malaysia. E-mail:
kianping@um