The message in weekly exchange rates in the European Monetary System: mean reversion, conditional heteroskedasticity and jumps
AbstractWeekly rates of the European Monetary System (EMS) vis-a-vis the Deutsche mark from April 1979 to March 1991 are modeled as a combined MA (1)-GARCH (1, 1)-jump process. The moving average (MA) part accounts for mean reversion required for the rates to stay inside the target zone. The generalized autoregressive conditional heteroscedasticity (GARCH) part accounts for changing volatility, whereas the jump process models parity changes and other erratic movements. Using an adjusted Pearson chi-squared goodness-of-fit test, we find similar results for the Bernoulli and the Poisson jump processes. In those cases in which the Bernoulli-normal distribution does not pass the goodness-of-fit test, a mixture of three normals does. Finally the MA (1)-GARCH (1, 1)-Bernoulli jump models are jointly estimated assuming a constant contemporaneous correlation matrix for the disturbances and a common jump probability for all the currencies.
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Bibliographic InfoPaper provided by Maastricht University in its series Open Access publications from Maastricht University with number urn:nbn:nl:ui:27-5754.
Date of creation: 1993
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Publication status: Published in Journal of business & economic statistics (1993) v.11, p.351-360
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Other versions of this item:
- Vlaar, Peter J G & Palm, Franz C, 1993. "The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 351-60, July.
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