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Markov switching GARCH models of currency turmoil in southeast Asia

Celso Brunetti (), Roberto Mariano (), Chiara Scotti () and Augustine H. H. Tan

No 889, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper analyzes exchange rate turmoil with a Markov Switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: "ordinary" regime, characterized by low exchange rate changes and low volatility, and "turbulent" regime, characterized by high exchange rate movements and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulence and ordinary periods.

Keywords: Foreign exchange rates; Econometric models; Financial markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ifn, nep-mac and nep-rmg
Date: 2007
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