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An Objective Function for Simulation Based Inference on Exchange Rate Data

23 Pages Posted: 21 Feb 2007  

Manfred Gilli

Geneva School of Economics and Management (GSEM); Swiss Finance Institute

Peter Winker

University of Giessen - Department of Economics

Vahidin Jeleskovic

University of Giessen - Department of Economics

Date Written: February 19, 2007

Abstract

The assessment of models of financial market behavior requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent based microsimulation models or complex multifractal models, simulation based estimators might provide an alternative. In order to apply such techniques, an objective function is required, which should be based on robust statistics of the time series under consideration.

Based on the identification of robust statistics of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. A bootstrap procedure is used to obtain an estimate of the variance-covariancematrix of the different moments included in the objective function, which is used as a base for the weighting matrix.

Finally, the properties of the objective function are analyzed for two different agent based models of the foreign exchange market, a simple GARCH-model and a stochastic volatility model using the DM/US-$ exchange rate as a benchmark. It is also discussed how the results might be used for inference purposes.

Keywords: Indirect estimation, simulation based estimation, exchange rate returns

JEL Classification: C14, C15, F31

Suggested Citation

Gilli, Manfred and Winker, Peter and Jeleskovic, Vahidin, An Objective Function for Simulation Based Inference on Exchange Rate Data (February 19, 2007). Swiss Finance Institute Research Paper No. 07-01. Available at SSRN: https://ssrn.com/abstract=964131 or http://dx.doi.org/10.2139/ssrn.964131

Manfred Gilli

Geneva School of Economics and Management (GSEM) ( email )

Bd du Pont d'Arve 46
Geneva 4, 1211
Switzerland
+41223798222 (Phone)
+41223798299 (Fax)

HOME PAGE: http://www.unige.ch/ses/metri/gilli/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Peter Winker (Contact Author)

University of Giessen - Department of Economics ( email )

Licher Str. 62
D-35394 Giessen, DE
Germany

HOME PAGE: http://wiwi.uni-giessen.de/home/oekonometrie/

Vahidin Jeleskovic

University of Giessen - Department of Economics ( email )

Licher Str. 62
Giessen, Hessen D-35394
Germany

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