Higher Moments and Exchange Rate Behavior

This paper uses 15-minute exchange rate returns data for the six most liquid currencies (i.e., the Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, and Swiss franc) vis-a-vis the United States dollar to examine whether a GARCH model augmented with higher moments (HM-GARCH) performs better than a traditional GARCH (TG) model. Two findings are unraveled. First, the inclusion of odd/even moments in modeling the return/variance improves the statistical performance of the HM-GARCH model. Second, trading strategies that extract buy and sell trading signals based on exchange rate forecasts from HM-GARCH models are more profitable than those that depend on TG models.