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Foreign exchange rates under Markov Regime switching model

Stéphane Goutte () and Benteng Zou ()

CREA Discussion Paper Series from Center for Research in Economic Analysis, University of Luxembourg

Abstract: Under Hamilton (1989)’s type Markov regime switching framework, modified Cox-Ingersoll-Ross model is employed to study foreign exchange rate, where all parameters value depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is presented and is employed to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models. We illustrate our model on various foreign exchange rate data and clarify some significant economic time periods in which financial or economic crisis appeared, thus, regime switching obtained.

Keywords: Foreign exchange rate; Regime switching model; calibration; financial crisis. (search for similar items in EconPapers)
JEL-codes: F31 C58 C51 C01 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:11-16

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