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Regime-switching models for exchange rates

Panopoulou, Ekaterini, Pantelidis, Theologos (2015) Regime-switching models for exchange rates. The European Journal of Finance, 21 (12). pp. 1023-1069. ISSN 1351-847X. (doi:10.1080/1351847X.2014.904240) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1080/1351847X.2014.904240

Abstract

This study provides evidence of periodically collapsing bubbles in the British pound to US dollar exchange rate in the post-1973 period. We develop two- and three-state regime-switching (RS) models that relate the expected exchange rate return to the bubble size and to an additional explanatory variable. Specifically, we consider six alternative explanatory variables that have been proposed in the literature as early warning indicators of a currency crisis. Our findings suggest that the RS models are, in general, more accurate than the Random Walk model in terms of both statistical and especially economic evaluation criteria for exchange rate forecasts. Our three-state RS model outperforms the two-state models and among the variables considered in our analysis, the short-term interest rate is the optimal variable, closely followed by imports. Results are more promising for one-month predictions and are qualitatively robust over sample spans. However, various robustness checks based on other exchange rates show that the optimal bubble measures and optimal predictors critically depend on the exchange rate.

Item Type: Article
DOI/Identification number: 10.1080/1351847X.2014.904240
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School
Depositing User: Ekaterini Panopoulou
Date Deposited: 19 Sep 2014 19:44 UTC
Last Modified: 29 May 2019 13:06 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/43023 (The current URI for this page, for reference purposes)
Panopoulou, Ekaterini: https://orcid.org/0000-0001-5080-9965
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