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v1 (23-11-2011)

v2 (23-01-2012)

Continuous time regime switching model applied to foreign exchange rate.

Stéphane Goutte 1, Benteng Zou 2

FUI project R = MC2 Collaboration(s)

(21/01/2012)

Modified Cox-Ingersoll-Ross model is employed, combining with Hamilton (1989) type Markov regime switching framework, to study foreign exchange rates, where all parameter values depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is extended to this more general model and it is applied to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models and notice that our results match much better the reality than the others without Markov switching. Furthermore, we illustrate our model on various foreign exchange rate data and clarify some significant eco- nomic time periods in which financial or economic crisis appeared, thus, regime switching obtained.

1 :	Laboratoire de Probabilités et Modèles Aléatoires (LPMA)
	CNRS : UMR7599 – Université Paris VI - Pierre et Marie Curie – Université Paris VII - Paris Diderot
2 :	Center for Research in Economic Analysis (CREA)
	Université du Luxembourg

Équipe de recherche : Center for Research in Economic Analysis CREA

Domaine

:

Économie et finance quantitative/Econométrie de la finance

Mots Clés : Foreign exchange rate – Regime switching model – calibration – financial crisis

hal-00643900, version 2

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Contributeur : Stéphane Goutte <>

Soumis le : Lundi 23 Janvier 2012, 11:16:23

Dernière modification le : Lundi 23 Janvier 2012, 17:22:25