A Utility Based Comparison of Some Models of Exchange Rate Volatility

47 Pages Posted: 28 Dec 2006  

Kenneth D. West

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Hali J. Edison

International Monetary Fund (IMF) - Research Department

Dongchul Cho

Korea Development Institute (KDI) - Macroeconomic Policy Division

Date Written: November 1992

Abstract

When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonpararnetric models for the conditional variance of each exchange rate, GARCI-J models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.

Suggested Citation

West, Kenneth D. and Edison, Hali J. and Cho, Dongchul, A Utility Based Comparison of Some Models of Exchange Rate Volatility (November 1992). NBER Working Paper No. t0128. Available at SSRN: https://ssrn.com/abstract=573120

Kenneth D. West (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-0033 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hali J. Edison

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6946 (Phone)
202-589-6946 (Fax)

Dongchul Cho

Korea Development Institute (KDI) - Macroeconomic Policy Division ( email )

P.O. Box 113 Cheongryangri Dong
Seoul 130-012
Korea
011-82-2-958-4046 (Phone)
011-82-2-965-0393 (Fax)

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