Regime switching in currency markets and portfolio flows

Foley Aj ()
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Foley Aj: Managing Director, Advanced Research Center, State Street Global Advisors

Journal of Asset Management, 2002, vol. 2, issue 4, No 5, 353-367

Abstract: Abstract This paper analyses a three-state Markov switching model with time-varying transition probabilities. The transition probabilities are modelled as functions of portfolio flows at a daily frequency. The evidence supports the hypothesis that currency market behaviour is characterised by regimes and that the probability of staying in a regime is materially impacted by portfolio flows. This suggests that timely knowledge of portfolio flows should be useful information for market partifipants attempting to add value via active currency trading.

Keywords: currency volatility; EM algorithm; portfolio flows; regime switching (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1057/palgrave.jam.2240058

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