Predicting regime switching in BRICS currency volatility: a Markov switching autoregressive approach

Suman Das () and Saikat Sinha Roy
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Suman Das: Jadavpur University

DECISION: Official Journal of the Indian Institute of Management Calcutta, 2021, vol. 48, issue 2, No 4, 165-180

Abstract: Abstract Empirical evidence on foreign exchange markets in emerging market economies shows changing volatility patterns. Using a univariate Markov regime switching model on daily data between April 2006 and March 2018, this paper identifies the turning points in volatility pattern in BRICS currency markets. The smoothed probability curves identify the phases of volatility during the period. Chinese Yuan is found to be the least volatile across regimes among BRICS currencies, whereas it is the highest for South African Rand. Such lower volatility in Chinese currency follows from higher intervention in the currency market by The People’s Bank of China, as is evident from the intervention index. The results have implications for exchange rate policy interventions, volatility transmission in foreign exchange markets and asset portfolio choices of emerging market economies.

Keywords: Exchange rate; Markov regime switching; Exchange market pressure; Intervention index; Market synchronization; BRICS (search for similar items in EconPapers)
JEL-codes: C34 C58 E44 F31 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40622-021-00275-9

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