Do currency markets have a long-run relationship and evolve together?

Abstract

The paper is part of the trend of studying the interdependence of currency pairs, and its aim is to examine whether the relationship between selected currency pairs in which the Polish zloty is the base currency is cointegrating and thus corresponds to a dynamic equilibrium between the studied currencies, and whether the regression between them makes sense and is not posed by time. To achieve this goal, the stationarity of the selected processes (exchange rates), the degree of integration, and cointegration were examined. Correct identification of the mechanisms allows for a correct description of the relationship of individual currency pairs and affects the selection of an appropriate class of models, which can form the basis for further macroeconomic forecasts. The analysis shows that only the GBP–EUR and GBP–CHF markets are cointegrated, and the results of the estimation of the VECM equation confirmed that only these currency pairs are characterized by a long-run relationship and thus the indicated markets co-evolve. In the case of the remaining markets included in the analysis, only short-term relationships were shown to exist.