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SWARCH and the implicit volatility of the Real/USD exchange rate

Author

Listed:
  • Rafael Machado Santana

    (Instituto de Pesquisas Econômicas (IPE), USP)

  • Rodrigo De Losso da Silveira Bueno

    (EAESP/FGV)

Abstract

This paper evaluates empirically the volatility prediction and the informational content of the exchange rate variation. The comparison is built on two different models. The rst is a markov switching model on the conditional variance – SWARCH (Hamilton, 1994). The second model is based on the Garman e Kohlhagen (1983) option pricing model, from which one extracts the implicit volatility. The results show that the SWARCH’s performance is better in both dimensions and contrast with the literature in two aspects: rst because the model with switching regime is not as usual as the ones without it, second because the best model is based on historical data rather than implicit volatility.

Suggested Citation

  • Rafael Machado Santana & Rodrigo De Losso da Silveira Bueno, 2008. "SWARCH and the implicit volatility of the Real/USD exchange rate," Brazilian Review of Finance, Brazilian Society of Finance, vol. 6(2), pages 235-265.
    • Handle: RePEc:brf:journl:v:6:y:2008:i:2:p:235-265
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    More about this item

    Keywords

    SWARCH; regime switching; persistance; implicit volatility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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