C51 Model Construction and Estimation
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- 2003 (2) (remove)
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- GARCH-Prozess (2)
- Density Forecasting (1)
- Devisenmarkt (1)
- Kapitalanlage (1)
- Kursrisiko (1)
- Predictive Likelihood (1)
- Risk Management (1)
- STAR GARCH (1)
- Value at Risk (1)
- Wechselkurs (1)
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We develop a behavioral exchange rate model with chartists and fundamentalists to study cyclical behavior in foreign exchange markets. Within our model, the market impact of fundamentalists depends on the strength of their belief in fundamental analysis. Estimation of a STAR GARCH model shows that the more the exchange rate deviates from its fundamental value, the more fundamentalists leave the market. In contrast to previous findings, our paper indicates that due to the nonlinear presence of fundamentalists, market stability decreases with increasing misalignments. A stabilization policy such as central bank interventions may help to deflate bubbles.
The use of GARCH models with stable Paretian innovations in financial modeling has been recently suggested in the literature. This class of processes is attractive because it allows for conditional skewness and leptokurtosis of financial returns without ruling out normality. This contribution illustrates their usefulness in predicting the downside risk of financial assets in the context of modeling foreign exchange-rates and demonstrates their superiority over use of normal or StudentĀ“s t GARCH models.