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A utility-based comparison of some models of exchange rate volatility

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  • West, Kenneth D.
  • Edison, Hali J.
  • Cho, Dongchul

Abstract

When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonpararnetric models for the conditional variance of each exchange rate, GARCI-J models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 35 (1993)
Issue (Month): 1-2 (August)
Pages: 23-45

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Handle: RePEc:eee:inecon:v:35:y:1993:i:1-2:p:23-45
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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