An Objective Function for Simulation Based Inference on Exchange Rate Data

Manfred Gilli (), Peter Winker and Vahidin Jeleskovic
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Vahidin Jeleskovic: University of Erfurt

No 147, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: The assessment of models of financial market behaviour requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent based microsimulation models or multifractal models, simulation based estimators might provide an alternative. In order to apply such techniques, an objective function is required, which should be based on robust statistics of the time series under consideration. Based on the identification of robust moments of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account both stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. Results from a bootstrap procedure are used to obtain an estimate of the variance-covariance matrix of the different moments included in the objective function, which is used as a base for the weighting matrix. Finally, the properties of the objective function are analyzed for two different agent based models of the foreign exchange market using the DM/US-\$ as a benchmark

Keywords: Indirect estimation; simulated based estimation; exchange rates (search for similar items in EconPapers)
JEL-codes: C15 C63 (search for similar items in EconPapers)
Date: 2006-07-04
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Journal Article: An objective function for simulation based inference on exchange rate data (2007)
Working Paper: An Objective Function for Simulation Based Inference on Exchange Rate Data (2007)
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