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Identifying structural changes and associations in exchange rates with Markov switching models. The evidence from Central European currency markets

Hanna Kołodziejczyk ()
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Hanna Kołodziejczyk: Poznań University of Economics and Business

Bank i Kredyt, 2020, vol. 51, issue 1, 69-90

Abstract: Exchange rates can experience structural changes, switching between periods of high and low volatility, which is particularly true with regard to developing countries’ currencies. In this paper we model exchange rate daily returns of three Central European currencies against the euro with Hamilton’s regime switching model. The goal is to identify periods of high and low volatility, compare the estimates of volatility obtained from the model and the persistence of those volatility regimes between countries and to check whether associations exist between exchange rates with regard to periods of high and low volatility. The results suggest that regime switches in volatility did occur during the 2014–2018 period. The EURCZK exchange rate experienced the lowest volatility, while EURHUF stayed within regimes the longest. The periods of high and low volatility are not independent between countries, with the strongest similarities detected between the EURHUF and EURPLN exchange rates.

Keywords: structural changes; Markov switching model; exchange rate comovement (search for similar items in EconPapers)
JEL-codes: C58 G17 F31 (search for similar items in EconPapers)
Date: 2020
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Handle: RePEc:nbp:nbpbik:v:51:y:2020:i:1:p:69-90