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Markov switching GARCH models of currency turmoil in Southeast Asia

Celso Brunetti (), Chiara Scotti (), Roberto Mariano () and Augustine H.H. Tan

Emerging Markets Review, 2008, vol. 9, issue 2, 104-128

Abstract: This paper analyzes exchange rate turmoil with a Markov switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: "ordinary" regime, characterized by low exchange rate changes and low volatility, and "turbulent" regime, characterized by high exchange rate devaluation and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulent and ordinary periods.

Date: 2008
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