An Assessment of Empirical Model Performance When Financial Market Transactions are Observed at Different Data Frequencies: An Application to East Asian Exchange Rates

Posted: 6 Nov 2002

See all articles by Christopher B. Barrett

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Christopher Fawson

Utah State University - College of Business - Department of Economics

Kai Li Wang

Tunghai University; Tamkang University

Abstract

This paper compares the performance of alternative models of East Asian exchange rates at different data frequencies. Selected models employ different specifications of the conditional variance and the conditional error distribution. Conditional variance specifications include: Homoscedasticity, GARCH, LGARCH, and EGARCH. Conditional error distribution specifications include normal and Student. The best exchange rate model specification is clearly conditional on data frequency. Higher frequency (daily, weekly) data commonly exhibit characteristics that demand more sophisticated estimation methods than analysts commonly employ. These characteristics generally vanish at lower (monthly, quarterly) frequencies. Overall we find significant benefit from accommodating heteroscedasticity and leptokurtic properties of the conditional distribution as data frequency increases. Using a likelihood ratio test we compare the relative gain from addressing heteroscedasticity (through use of GARCH models) versus accommodation of leptokurtosis. This comparison suggests that the gains from correct specification of the conditional distribution dominate those obtained from addressing problems of heteroscedasticity.

JEL Classification: F31, C52

Suggested Citation

Barrett, Christopher B. and Fawson, Chris and Wang, Kai-Li, An Assessment of Empirical Model Performance When Financial Market Transactions are Observed at Different Data Frequencies: An Application to East Asian Exchange Rates. Available at SSRN: https://ssrn.com/abstract=329631

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

315 Warren Hall
Ithaca, NY 14853-7801
United States
607-255-4489 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://aem.cornell.edu/faculty_sites/cbb2/

Chris Fawson

Utah State University - College of Business - Department of Economics ( email )

3530 Old Main Hill
Logan, UT 84322-3530
United States

Kai-Li Wang (Contact Author)

Tunghai University ( email )

Taichung 407
Taiwan

Tamkang University ( email )

Department of International Trade
Taiwan 25137
China

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