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Foreign exchange rates under Markov Regime switching model

  • Stéphane GOUTTE

    ()

    (CNRS, Laboratoire de Probabilités et Modèles Al éatoires, Paris 7)

  • Benteng Zou

    ()

    (CREA, University of Luxembourg)

Under Hamilton (1989)’s type Markov regime switching framework, modified Cox-Ingersoll-Ross model is employed to study foreign exchange rate, where all parameters value depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is presented and is employed to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models. We illustrate our model on various foreign exchange rate data and clarify some significant economic time periods in which financial or economic crisis appeared, thus, regime switching obtained.

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File URL: http://wwwen.uni.lu/content/download/44003/508037/file/2011-16%20-%20Foreign%20exchange%20rates%20under%20Markov%20Regime%20switching%20model.pdf
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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 11-16.

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Date of creation: 2011
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Handle: RePEc:luc:wpaper:11-16
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