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Markov switching GARCH models of currency turmoil in southeast Asia

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Author Info
Celso Brunetti
Roberto S. Mariano
Chiara Scotti
Augustine H.H. Tan

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Abstract

This paper analyzes exchange rate turmoil with a Markov Switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: "ordinary" regime, characterized by low exchange rate changes and low volatility, and "turbulent" regime, characterized by high exchange rate movements and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulence and ordinary periods.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 889.

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Date of creation: 2007
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Handle: RePEc:fip:fedgif:889

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Keywords: Foreign exchange rates ; Econometric models ; Financial markets;

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