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The exchange rate and macroeconomic determinants: Time-varying transitional dynamics

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  • Yuan, Chunming
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    Abstract

    In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market's belief in the probability of the process staying in certain regime next period. This paper further takes into account the ARCH effects of the volatility of the exchange rate. Empirical results generally confirm that fundamentals can affect the evolution of the dynamics of the exchange rate in a nonlinear way through the transition probabilities. In addition, I find that the volatility of the exchange rate is associated with significant ARCH effects which are subject to regime changes.

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    Bibliographic Info

    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 22 (2011)
    Issue (Month): 2 (August)
    Pages: 197-220

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    Handle: RePEc:eee:ecofin:v:22:y:2011:i:2:p:197-220

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    Web page: http://www.elsevier.com/locate/inca/620163

    Related research

    Keywords: Exchange rate Macroeconomic determinants Markov-switching ARCH Time-varying;

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    Cited by:
    1. Haas, Markus & Krause, Jochen & Paolella, Marc S. & Steude, Sven C., 2013. "Time-varying mixture GARCH models and asymmetric volatility," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 602-623.
    2. Ng, Andrew C.Y. & Li, Johnny Siu-Hang & Chan, Wai-Sum, 2013. "Pricing options on stocks denominated in different currencies: Theory and illustrations," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 339-354.
    3. Lee, Chin & Law, Chee-Hong, 2013. "The Effects of Trade Openness on Malaysian Exchange Rate," MPRA Paper 45185, University Library of Munich, Germany.
    4. Bailliu, Jeannine & Dib, Ali & Kano, Takashi & Schembri, Lawrence, 2014. "Multilateral adjustment, regime switching and real exchange rate dynamics," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 68-87.

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