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Application of a Modified TAR Model to CIP Deviations in Asian Data

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  • Elena Tchernykh Branson

    (Hong Kong Institute of Monetary Research)

Abstract

The methodology to be used in this paper is estimation of a threshold autoregressive (TAR) model. In this model deviations are random within a band defined by transactions costs and contract risk, and autoregressive towards the band outside it. The principal reference is Tchernykh (1998). These estimates can provide indicators for policy-makers of the market¡¦s expectation of crisis. They could also provide indicators for the private sector of convergence of deviations to their usual bands. The estimation methodology is a non-linear three-regime maximum likelihood procedure. The TAR model has the potential to be applied to differentials between linked pairs of financial market prices more generally. This paper modifies the classical TAR model to allow for progressive deviations from a stochastic regime, rather than simple jumps.

Suggested Citation

  • Elena Tchernykh Branson, 2004. "Application of a Modified TAR Model to CIP Deviations in Asian Data," Working Papers 192004, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:192004
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    References listed on IDEAS

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    1. Mark P. Taylor & Elena Tchernykh Branson, 2004. "Asymmetric Arbitrage and Default Premiums Between the U.S. and Russian Financial Markets," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 1-3.
    2. Branson, William H, 1969. "The Minimum Covered Interest Differential Needed for International Arbitrage Activity," Journal of Political Economy, University of Chicago Press, vol. 77(6), pages 1028-1035, Nov./Dec..
    3. Granger, Clive W. J. & Terasvirta, Timo, 1993. "Modelling Non-Linear Economic Relationships," OUP Catalogue, Oxford University Press, number 9780198773207, Decembrie.
    4. Peel, David A & Taylor, Mark P, 2002. "Covered Interest Rate Arbitrage in the Interwar Period and the Keynes-Einzig Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 51-75, February.
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    Cited by:

    1. Elena Tchernykh & William H. Branson, 2005. "Regime-Switching Behavior of the Term Structure of Forward Markets," NBER Working Papers 11517, National Bureau of Economic Research, Inc.

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