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Markov switching GARCH models of currency turmoil in southeast Asia


  • Celso Brunetti
  • Roberto S. Mariano
  • Chiara Scotti
  • Augustine H. H. Tan


This paper analyzes exchange rate turmoil with a Markov Switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: "ordinary" regime, characterized by low exchange rate changes and low volatility, and "turbulent" regime, characterized by high exchange rate movements and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulence and ordinary periods.

Suggested Citation

  • Celso Brunetti & Roberto S. Mariano & Chiara Scotti & Augustine H. H. Tan, 2007. "Markov switching GARCH models of currency turmoil in southeast Asia," International Finance Discussion Papers 889, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:889

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    References listed on IDEAS

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    Cited by:

    1. Flavin, Thomas J. & Sheenan, Lisa, 2015. "The role of U.S. subprime mortgage-backed assets in propagating the crisis: Contagion or interdependence?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 167-186.
    2. Alberto Humala & Gabriel Rodriguez, 2010. "Foreign exchange intervention and exchange rate volatility in Peru," Applied Economics Letters, Taylor & Francis Journals, vol. 17(15), pages 1485-1491.
    3. repec:eee:mulfin:v:42-43:y:2017:i::p:152-163 is not listed on IDEAS
    4. Khallouli, Wajih & Sandretto, René, 2012. "Testing for “Contagion” of the Subprime Crisis on the Middle East and North African Stock Markets: A Markov Switching EGARCH Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 27, pages 134-166.
    5. Wajih Khallouli & Rene Sandretto, 2011. "Testing for “Contagion” of the Subprime Crisis on the Middle East And North African Stock Markets: A Markov Switching EGARCH Approach," Working Papers 609, Economic Research Forum, revised 08 Jan 2011.
    6. Walid, Chkili & Chaker, Aloui & Masood, Omar & Fry, John, 2011. "Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach," Emerging Markets Review, Elsevier, vol. 12(3), pages 272-292, September.
    7. Thibaut Duprey & Benjamin Klaus, 2017. "How to Predict Financial Stress? An Assessment of Markov Switching Models," Staff Working Papers 17-32, Bank of Canada.
    8. repec:ipg:wpaper:2013-032 is not listed on IDEAS
    9. Michael Frömmel, 2010. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 2-21, February.
    10. Giampiero M. Gallo & Edoardo Otranto, 2007. "Volatility transmission across markets: a Multichain Markov Switching model," Applied Financial Economics, Taylor & Francis Journals, vol. 17(8), pages 659-670.
    11. Thomas Chuffart, 2015. "Selection Criteria in Regime Switching Conditional Volatility Models," Econometrics, MDPI, Open Access Journal, vol. 3(2), pages 1-28, May.
    12. Houda Rharrabti Zaid, 2015. "Transmission du stress financier de la zone euro aux Pays de l’Europe Centrale et Orientale," EconomiX Working Papers 2015-37, University of Paris Nanterre, EconomiX.
    13. Demiris, Nikolaos & Kypraios, Theodore & Smith, L. Vanessa, 2012. "On the epidemic of financial crises," MPRA Paper 46693, University Library of Munich, Germany.
    14. Khaled Guesmi & Frédéric Teulon & Zied Ftiti, 2013. "Sudden Changes in Volatility in European Stock Markets," Working Papers 2013-32, Department of Research, Ipag Business School.
    15. Kim Liow & Zhiwei Chen & Jingran Liu, 2011. "Multiple Regimes and Volatility Transmission in Securitized Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 42(3), pages 295-328, April.
    16. repec:ipg:wpaper:32 is not listed on IDEAS
    17. Aloui, Chaker & Hammoudeh, Shawkat & Hamida, Hela Ben, 2015. "Price discovery and regime shift behavior in the relationship between sharia stocks and sukuk: A two-state Markov switching analysis," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 121-135.
    18. Martín Solá & Zacharias Psaradakis & Fabio Spagnolo & Nicola Spagnolo, 2010. "Some Cautionary Results Concerning Markov-Switching Models with Time-Varying Transition Probabilities," Department of Economics Working Papers 2010-12, Universidad Torcuato Di Tella.

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