Time-varying/sign-switching risk perception on foreign exchange markets
✍ Scribed by Giampiero M. Gallo; Barbara Pacini
- Publisher
- John Wiley and Sons
- Year
- 1998
- Tongue
- English
- Weight
- 267 KB
- Volume
- 3
- Category
- Article
- ISSN
- 1076-9307
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✦ Synopsis
In this paper we analyse the consequences of considering risk-augmented specifications of the relationship between spot and forward rates. Previous parametric specifications such as the GARCH-M provided disappointing results possibly due to the high degree of persistence of the estimated process for conditional volatility. We propose a more flexible semiparametric approach where a nonparametric estimator of the conditional volatility is used as an instrumental variable, and we apply it on six major currencies vis-a `-vis the Deutsche Mark (monthly data). An interesting picture of shifting risk perception arises when an indicator of market sentiment in the form of trading signals to purchase or sell a currency is inserted in the model.