Markov Switching Garch Models of Currency Turmoil in Southeast Asia

44 Pages Posted: 3 Apr 2007

See all articles by Celso Brunetti

Celso Brunetti

Board of Governors of the Federal Reserve System

Roberto S. Mariano

Singapore Management University

Augustine H.H. Tan

Singapore Management University - School of Social Sciences

Chiara Scotti

Board of Governors of the Federal Reserve System

Date Written: January 2007

Abstract

This paper analyzes exchange rate turmoil with a Markov Switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: "ordinary" regime, characterized by low exchange rate changes and low volatility, and "turbulent" regime, characterized by high exchange rate movements and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulence and ordinary periods.

Keywords: Currency crises, Financial markets, Banking sector, Regime Switching, Volatility

JEL Classification: C13, C22, C52, F31, F34

Suggested Citation

Brunetti, Celso and Mariano, Roberto S. and Tan, Augustine H.H. and Scotti, Chiara, Markov Switching Garch Models of Currency Turmoil in Southeast Asia (January 2007). FRB International Finance Discussion Paper No. 889. Available at SSRN: https://ssrn.com/abstract=977181 or http://dx.doi.org/10.2139/ssrn.977181

Celso Brunetti (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Roberto S. Mariano

Singapore Management University ( email )

50 Stamford Rd.
Singapore 912409, 178899
Singapore

Augustine H.H. Tan

Singapore Management University - School of Social Sciences ( email )

Tanglin P.O. Box 257
Singapore 912409
Singapore
+65 6822 0379 (Phone)
+65 6822 0101 (Fax)

Chiara Scotti

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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