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Markov Switching in Exchange Rate Models: Will More Regimes Help?

Author

Listed:
  • Josh Stillwagon
  • Peter Sullivan

    (Department of Economics, Trinity College)

Abstract

This paper examines the performance of Markov switching models (MSM) of the exchange rate using a data driven approach to determine the number of regimes. The analysis is conducted for the British pound/USD over the last thirty years with alternative specifications from the literature. A noteworthy finding is that there is a close correspondence among the number of regimes that minimizes mean square forecast errors, the number of regimes selected by traditional information criteria (but not Markov switching specific information criteria), and the fewest regimes with well-behaved residuals. Although allowing for more regimes yields improvement over single or two regime models, the MSM is still unable to outperform a random walk.

Suggested Citation

  • Josh Stillwagon & Peter Sullivan, 2016. "Markov Switching in Exchange Rate Models: Will More Regimes Help?," Working Papers 1602, Trinity College, Department of Economics.
    • Handle: RePEc:tri:wpaper:1602
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    File URL: http://www3.trincoll.edu/repec/WorkingPapers2016/WP16-02.pdf
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    Cited by:

    1. is not listed on IDEAS
    2. Syarifah Inayati & Nur Iriawan & Irhamah, 2024. "A Markov Switching Autoregressive Model with Time-Varying Parameters," Forecasting, MDPI, vol. 6(3), pages 1-23, July.
    3. de Souza Vasconcelos, Camila & Hadad Júnior, Eli, 2023. "Forecasting exchange rate: A bibliometric and content analysis," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 607-628.
    4. Dejan Živkov & Slavica Manić & Ivan Pavkov, 2022. "Nonlinear examination of the ‘Heat Wave’ and ‘Meteor Shower’ effects between spot and futures markets of the precious metals," Empirical Economics, Springer, vol. 63(2), pages 1109-1134, August.

    More about this item

    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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