Forward and spot exchange rates in a bivariate TAR framework

R. Dacco and S. Satchell

The European Journal of Finance, 2001, vol. 7, issue 2, 131-143

Abstract: Structural exchange rate models explain only a small part of the movements in dollar exchange rate. Recent empirical work has focused on the failure to account for nonlinearities in the data generating mechanism, as an explanation of this bad performance. Here two bivariate threshold autoregressive models for the spot and forward exchange rates are considered. In the first model the regimes are determined by the log difference of the two rates; in the second one the regimes are driven by the forward spot no-arbitrage condition. These processes are able to capture the 'swing' behaviour observed in the exchange rate market. Finally the forecasting ability of the models for the dollar/DM exchange rate is evaluated by stochastic simulation.

Keywords: Nonlinear Techniques Seemingly Unrelated Bivariate Threshold Autoregression Subitar Model Stochastic Simulation Dollar Dm Exchange Rate (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1080/13518470122779

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