A Utility Based Comparison of Some Models of Exchange Rate Volatility

Kenneth West (), Hali Edison () and Dongchul Cho

No 128, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonpararnetric models for the conditional variance of each exchange rate, GARCI-J models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.

Date: 1992-11
Note: IFM AP
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Published as Journal of International Economics 1993, vol. 35, no.1, pp. 23-46

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Journal Article: A utility-based comparison of some models of exchange rate volatility (1993)
Working Paper: A utility based comparison of some models of exchange rate volatility (1993)
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