Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2003
Abstract
This paper develops a model which is able to forecast exchange rate turmoil. Our starting point relies on the empirical evidence that exchange rate volatility is not constant. In fact, the modeling strategy adopted refers to the vast literature of the GARCH class of models, where the variance process is explicitly modeled. Further empirical evidence shows that it is possible to distinguish between two different regimes: îordinaryî versus îturbulenceî. Low exchange rate changes are associated with low volatility (ordinary regime) and high exchange rate devaluations go together with high volatility. This calls for a regime switching approach. In our model we also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rate, money supply relative to reserves, stock index returns and bank stock index returns and volatility are the major indicators.
Discipline
Asian Studies | Econometrics | International Economics
Research Areas
International Economics
Volume
03-2003
First Page
1
Last Page
43
Publisher
SMU Economics and Statistics Working Paper Series, No. 03-2003
City or Country
Singapore
Citation
BRUNETTI, Celso; MARIANO, Roberto S.; SCOTTI, Chiara; and TAN, Augustine H. H..
Markov Switching GARCH Models of Currency Crises in Southeast Asia. (2003). 03-2003, 1-43.
Available at: https://ink.library.smu.edu.sg/soe_research/989
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.