COINTEGRATION ANALYSIS OF THE FOREIGN EXCHANGE RATE PAIRS

Abstract

Due to certain economic factors, Hungary and Poland—the two Central European (CE) countries—have not successfully adopted the Euro currency. We aim to investigate the dependency of the two CE currencies, HUF and PLZ, against the USD and the linking mechanism between them. Cointegration analysis is commonly used as a common econometric technique for evaluating such efficiency.In this article, we discuss the cointegration analysis of the selected foreign exchange (FX) rate pairs. Using bivariate error correction model (ECM), we investigate spot FX rate pairs of HUF/USD and PLZ/USD. The results from ECM are used in impulse response model for prediction of the new equilibrium after the exogenous shocks affecting the processes at time t.We have found that HUF reacts more closely with the change in USD and that HUF and PLZ are very unlikely to be cointegrated. Nonetheless, we have found the period when both spot exchange rates are weekly cointegrated, which was after August 2011. Although contributions are low, the analytical results are still statistically significant for other researches to be conducted with fractal analysis of these FX rates.