Celso Brunetti () (Department of Economics, University of Pennsylvania) Roberto S. Mariano () (Department of Economics, University of Pennsylvania and School of Economics and Social Studies, Singapore Management University) Chiara Scotti () (Department of Economics, University of Pennsylvania) Augustine H. H. Tan () (School of Economics and Social Studies, Singapore Management University)
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This paper develops a model which is able to forecast exchange rate turmoil. Our starting point relies on the empirical evidence that exchange rate volatility is not constant. In fact, the modeling strategy adopted refers to the vast literature of the GARCH class of models, where the variance process is explicitly modeled. Further empirical evidence shows that it is possible to distinguish between two different regimes: “ordinary” versus “turbulence”. Low exchange rate changes are associated with low volatility (ordinary regime) and high exchange rate devaluations go together with high volatility. This calls for a regime switching approach. In our model we also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rate, money supply relative to reserves, stock index returns and bank stock index returns and volatility are the major indicators.
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number
03-008.
Find related papers by JEL classification: F0 - International Economics - - General C5 - Mathematical and Quantitative Methods - - Econometric Modeling G1 - Financial Economics - - General Financial Markets
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996.
"Contagious Currency Crises,"
NBER Working Papers
5681, National Bureau of Economic Research, Inc.
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