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An objective function for simulation based inference on exchange rate data

Author

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  • Peter Winker

    ()

  • Manfred Gilli
  • Vahidin Jeleskovic

Abstract

The assessment of models of financial market behavior requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent basedmicrosimulationmodels or complex multifractal models, simulation based estimators might provide an alternative. In order to apply such techniques, an objective function is required, which should be based on robust statistics of the time series under consideration. Based on the identification of robust statistics of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. A bootstrap procedure is used to obtain an estimate of the variance-covariancematrix of the different moments included in the objective function, which is used as a base for the weighting matrix. Finally, the properties of the objective function are analyzed for two different agent based models of the foreign exchange market, a simple GARCH-model and a stochastic volatility model using the DM/US-$ exchange rate as a benchmark. It is also discussed how the results might be used for inference purposes.
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Suggested Citation

  • Peter Winker & Manfred Gilli & Vahidin Jeleskovic, 2007. "An objective function for simulation based inference on exchange rate data," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 2(2), pages 125-145, December.
  • Handle: RePEc:spr:jeicoo:v:2:y:2007:i:2:p:125-145
    DOI: 10.1007/s11403-007-0020-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Indirect estimation; Simulation based estimation; Exchange rate returns; C14; C15; F31;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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