CONSTRUCTION OF MODELS FOR BOUNDED PRICE PROCESSES: THE CASE OF THE HKD EXCHANGE RATE

Hong Ben Yee and Nikolai Dokuchaev ()
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Hong Ben Yee: Department of Mathematics Statistics, Curtin University, GPO Box U1987, Perth, Western Australia 6845, Australia
Nikolai Dokuchaev: Department of Mathematics Statistics, Curtin University, GPO Box U1987, Perth, Western Australia 6845, Australia

Annals of Financial Economics (AFE), 2015, vol. 10, issue 02, 1-23

Abstract: This paper discusses construction of evolution models for financial time series evolving within a given interval. We calibrated a model for the case of the USD/HKD exchange rate after the separation of strong and weak side convertibility undertakings, in which the rate is confined to a specified corridor. This process represents an interesting example of a tradable bounded process. A one-dimensional (1D) model was able to replicate the bounded distribution of the process, but a two-dimensional (2D) model better captured dynamics as measured by the volatility without losing features of the 1D model. We briefly consider the ergodic properties of these models.

Keywords: Currency corridor; bounded financial time series; 2D Markov model (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S2010495215500116

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