Continuous time regime-switching model applied to foreign exchange rate

Stéphane Goutte, Benteng ZOU

Abstract


The continuous time modified Cox-Ingersoll-Ross (1985) stochastic model is employed, combining with the Hamilton (1989) type Markov regime-switching framework, to study daily foreign exchange rates where all parameter values depend on the value of a continuous time Markov chain. The generalized Expectation-Maximization algorithm is applied to a more general class of regime switching models and used to study some exchange rate data. We compare the obtained results with non regime switching models and notice that the regime switching outcomes match much better the reality than the others without Markov switching; and two regimes in most of the cases are better than more regimes.

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Published: 2013-10-23

How to Cite this Article:

Stéphane Goutte, Benteng ZOU, Continuous time regime-switching model applied to foreign exchange rate, Mathematical Finance Letters, Vol 2013 (2013), Article ID 8

Copyright © 2013 Stéphane Goutte, Benteng ZOU. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Mathematical Finance Letters

ISSN 2051-2929

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