Modeling and estimating the jump risk of exchange rates: Applications to RMB

Yiming Wang and Hanfei Tong

Physica A: Statistical Mechanics and its Applications, 2008, vol. 387, issue 26, 6575-6583

Abstract: In this paper we propose a new type of continuous-time stochastic volatility model, SVDJ, for the spot exchange rate of RMB, and other foreign currencies. In the model, we assume that the change of exchange rate can be decomposed into two components. One is the normally small-cope innovation driven by the diffusion motion; the other is a large drop or rise engendered by the Poisson counting process. Furthermore, we develop a MCMC method to estimate our model. Empirical results indicate the significant existence of jumps in the exchange rate. Jump components explain a large proportion of the exchange rate change.

Keywords: Jump risk; MCMC; SVDJ model (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:387:y:2008:i:26:p:6575-6583

DOI: 10.1016/j.physa.2008.08.017

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