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An Objective Function for Simulation Based Inference on Exchange Rate Data

  • Manfred Gilli

    (University of Geneva)

  • Peter Winker

    ()

    (University of Giessen)

  • Vahidin Jeleskovic

    (University of Erfurt)

The assessment of models of financial market behaviour requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent based microsimulation models or 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 moments of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account both stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. Results from a bootstrap procedure are used to obtain an estimate of the variance-covariance matrix 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 using the DM/US-\$ as a benchmark

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 147.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:147
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  1. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
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