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A Three-State Markov-Modulated Switching Model for Exchange Rates

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  • Idowu Oluwasayo Ayodeji

Abstract

Several authors have examined the long swings hypothesis in exchange rates using a two-state Markov switching model. This study developed a model to investigate long swings hypothesis in currencies which may exhibit a -state pattern. The proposed model was then applied to euros, British pounds, Japanese yen, and Nigerian naira. Specification measures such as AIC, BIC, and HIC favoured a three-state pattern in Nigerian naira but a two-state one in the other three currencies. For the period January 2004 to May 2016, empirical results suggested the presence of asymmetric swings in naira and yen and long swings in euros and pounds. In addition, taking as the benchmark for smoothing probabilities, choice models provided a clear reading of the cycle in a manner that is consistent with the realities of the movements in corresponding exchange rate series.

Suggested Citation

  • Idowu Oluwasayo Ayodeji, 2016. "A Three-State Markov-Modulated Switching Model for Exchange Rates," Journal of Applied Mathematics, Hindawi, vol. 2016, pages 1-9, October.
    • Handle: RePEc:hin:jnljam:5061749
    DOI: 10.1155/2016/5061749
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    Cited by:

    1. Kai Zheng & Yuying Li & Weidong Xu, 2021. "Regime switching model estimation: spectral clustering hidden Markov model," Annals of Operations Research, Springer, vol. 303(1), pages 297-319, August.
    2. Idowu Oluwasayo Ayodeji, 2017. "Oil and the Naira: A Markov Switching Perspective," African Development Review, African Development Bank, vol. 29(4), pages 562-574, December.
    3. Suyi Kim & So-Yeun Kim & Kyungmee Choi, 2020. "Effect of Oil Prices on Exchange Rate Movements in Korea and Japan Using Markov Regime-Switching Models," Energies, MDPI, vol. 13(17), pages 1-16, August.
    4. Suyi Kim & So-Yeun Kim & Kyungmee Choi, 2019. "Analyzing Oil Price Shocks and Exchange Rates Movements in Korea using Markov Regime-Switching Models," Energies, MDPI, vol. 12(23), pages 1-16, December.

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