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Estimating Bivariate Garch-Jump Model Based On High Frequency Data: The Case Of Revaluation Of The Chinese Yuan In July 2005

Author

Listed:
  • XINHONG LU

    (Research Department, China Center for International Economic Exchanges, No. 22, Xi An Men Dajie, Xicheng District, Beijing 100017, China)

  • KEN-ICHI KAWAI

    (Department of Food and Nutrition, Beppu University, 82 Kita-ishigaki, Beppu, 874-8501, Japan)

  • KOICHI MAEKAWA

    (Faculty of Economics, Hiroshima University of Economics, 5-37-1, Gion, Asaminami, Hiroshima, 731-0192, Japan)

Abstract

This paper analyzes the behavior of one-minute high-frequency time-series data of exchange rates for five currencies (Japanese Yen, Australian Dollar, Canadian Dollar, Euro, and Pound Sterling) against the US Dollar when the Chinese Yuan was revalued on July 21st, 2005. The data show the following distinctive features: (1) There is a large jump in the exchange rates time series at the time of the Yuan revaluation. (2) Large volatility in the returns of exchange rates is observed for a while after the jump. (3) There are many other jumps, possibly correlated, in each exchange rate time series. To capture these features we fit the following models to the data: (i) a univariate GARCH-Jump model with a large jump that is influential on volatility, and (ii) a bivariate GARCH-Jump model with correlated Poisson jumps. For comparison, we also estimate these GARCH models without the associated jumps. The model performance is evaluated based on Value-at-Risk (VaR).

Suggested Citation

  • Xinhong Lu & Ken-Ichi Kawai & Koichi Maekawa, 2010. "Estimating Bivariate Garch-Jump Model Based On High Frequency Data: The Case Of Revaluation Of The Chinese Yuan In July 2005," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 27(02), pages 287-300.
    • Handle: RePEc:wsi:apjorx:v:27:y:2010:i:02:n:s0217595910002697
    DOI: 10.1142/S0217595910002697
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    References listed on IDEAS

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    1. Neil Shephard & Ole E. Barndorff-Nielsen & Department of Mathematical Sciences & University of Aarhus & Denmark, 2005. "Variation, jumps, market frictions and high frequency data in financial econometrics," Economics Series Working Papers 240, University of Oxford, Department of Economics.
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    2. Lian, Yu-Min & Chen, Jun-Home, 2020. "Joint dynamic modeling and option pricing in incomplete derivative-security market," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    3. Shuang Xiao & Guo Li & Yunjing Jia, 2017. "Estimating the Constant Elasticity of Variance Model with Data-Driven Markov Chain Monte Carlo Methods," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(01), pages 1-23, February.
    4. Lian, Yu-Min & Chen, Jun-Home & Liao, Szu-Lang, 2024. "Pricing derivatives on foreign assets using Markov-modulated cojump-diffusion dynamics," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 503-519.

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