Long memory and leverage effect of Euro exchange rate based on ARFIMA-FIEGARCH

To test long memory and leverage effect in daily exchange rate of Euro foreign exchange market, this paper builds ARFIMA-FIEGARCH model to the return series, using daily exchange rate of EUR/USD, EUR/JPY and EUR/GPB from 1st Jan 1999 to 31st Dec 2007. According to Akaike, Schwarz, Shibata and Hannan-Quinn information criterions, order of the model is fixed and parameter is estimated. The empirical result implies return series and volatility series of daily exchange rate of EUR/USD show significant long memory and ARFIMA(1,d
₁
,0)-FIEGARCH(1,d
₂
,0) is the optimization model. Return series of daily exchange rate of EUR/JPY and EUR/GBP do not show significant long memory but volatility series show significant long memory, and ARMA(1,0)-FIEGARCH(1,d,0) is the optimization model. Leverage effect (including sign effect and magnitude effect) exists in volatility series of daily exchange rate of three currency pairs, positive and negative information takes persistent influence on volatility of Euro foreign exchange market and volatility intensity gets enlarged.