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Predicting regime switching in BRICS currency volatility: a Markov switching autoregressive approach

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  • Suman Das

    (Jadavpur University)

  • Saikat Sinha Roy

    (Jadavpur University)

Abstract

Empirical evidence on foreign exchange markets in emerging market economies shows changing volatility patterns. Using a univariate Markov regime switching model on daily data between April 2006 and March 2018, this paper identifies the turning points in volatility pattern in BRICS currency markets. The smoothed probability curves identify the phases of volatility during the period. Chinese Yuan is found to be the least volatile across regimes among BRICS currencies, whereas it is the highest for South African Rand. Such lower volatility in Chinese currency follows from higher intervention in the currency market by The People’s Bank of China, as is evident from the intervention index. The results have implications for exchange rate policy interventions, volatility transmission in foreign exchange markets and asset portfolio choices of emerging market economies.

Suggested Citation

  • Suman Das & Saikat Sinha Roy, 2021. "Predicting regime switching in BRICS currency volatility: a Markov switching autoregressive approach," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 48(2), pages 165-180, June.
    • Handle: RePEc:spr:decisn:v:48:y:2021:i:2:d:10.1007_s40622-021-00275-9
    DOI: 10.1007/s40622-021-00275-9
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    Cited by:

    1. Das, Suman & Roy, Saikat Sinha, 2023. "Following the leaders? A study of co-movement and volatility spillover in BRICS currencies," Economic Systems, Elsevier, vol. 47(2).

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    More about this item

    Keywords

    Exchange rate; Markov regime switching; Exchange market pressure; Intervention index; Market synchronization; BRICS;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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