Can Markov switching models replicate chartist profits in the foreign exchange market?

Article Abstract:

In this paper we show that the Markov switching model is a relevant statistical alternative to the classical martingale model for exchange rates. By extending the standard Markov switching model we decisively reject the martingale model. Moreover, the model generates autocorrelations and linear structures in line with what is observed in reality. Subsequently, we test whether this model can explain chartist profits. We find that the extended Markov switching model is able to explain the profitability of a simple MA-30 rule. Finally, we decompose the profitability of the MA-30 rule into a linear and nonlinear part. We find that, although the implied linear structure of the Markov model explains a substantial part of the profitability, part of the profits of the MA-30 rule can be attributed to the specific nonlinearities implicit in the Markov model. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F31 Keywords: Markov switching; Exchange rates; Technical trading rules

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Evaluating forecasts from SETAR models of exchange rates

Article Abstract:

We consider the forecasting performance of two SETAR exchange rate models proposed by Krager and Kugler [J. Int. Money Fin. 12 (1993) 195]. Assuming that the models are good approximations to the data generating process, we show that whether the non-linearities inherent in the data can be exploited to forecast better than a random walk depends on both how forecast accuracy is assessed and on the `state of nature'. Evaluation based on traditional measures, such as (root) mean squared forecast errors, may mask the superiority of the nonlinear models. Generalized impulse response functions are also calculated as a means of portraying the asymmetric response to shocks implied by such models. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: C22; F47 Keywords: Exchange rate forecasts; Regime-switching models; Impulse responses

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Price dynamics under stochastic process switching: some extensions and an application to EMU

Article Abstract:

The problems related to the dynamics of asset prices when a predetermined pricing rule is announced and when conversion is at a fixed date were studied. A model that incorporated stochastic process switching was used to examine the specific asset price dynamics. Closed-form solutions for the price dynamics of the asset before the announcement date were devised and applied to the conversion of national currencies into the Euro on Jan 1 1999.

Public Finance Activities, National Government Assets, Economic policy, Capital assets, Privatization (Business), European Monetary System, Stochastic processes, Assets (Accounting), Capital assets pricing model, Capital asset pricing model

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