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Foreign exchange rates under Markov Regime switching model

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  • Stéphane GOUTTE

    ()
    (CNRS, Laboratoire de Probabilités et Modèles Al éatoires, Paris 7)

  • Benteng Zou

    ()
    (CREA, University of Luxembourg)

Abstract

Under Hamilton (1989)’s type Markov regime switching framework, modified Cox-Ingersoll-Ross model is employed to study foreign exchange rate, where all parameters value depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is presented and is employed to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models. We illustrate our model on various foreign exchange rate data and clarify some significant economic time periods in which financial or economic crisis appeared, thus, regime switching obtained.

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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 11-16.

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Date of creation: 2011
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Handle: RePEc:luc:wpaper:11-16

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Keywords: Foreign exchange rate; Regime switching model; calibration; financial crisis.;

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Cited by:
  1. Anatoliy Swishchuk & Maksym Tertychnyi & Winsor Hoang, 2014. "Currency Derivatives Pricing for Markov-modulated Merton Jump-diffusion Spot Forex Rate," Papers 1402.2273, arXiv.org.
  2. Anatoliy Swishchuk & Maksym Tertychnyi & Robert Elliott, 2014. "Pricing Currency Derivatives with Markov-modulated Levy Dynamics," Papers 1402.1953, arXiv.org.

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