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| Author: | Morana, C. Beltratti, A. |
| Title: | Structural change and long-range dependence in volatility of exchange rates: either, neither or both? |
| Journal: | Journal of Empirical Finance
2004 : DEC, VOL. 11:5, p. 629-658 |
| Index terms: | Forecasting Financial markets Currency Exchange rates Structural change Models |
| Language: | eng |
| Abstract: | This paper tests for the existence of long memory (hereafter as: l-m.) and structural breaks (here as: str-brk./ str-brks.) in the realized variance process for the DM/US$ and Yen/US$ exchange rates. While l-m. is evident in the actual processes, a str-brk. analysis reveals that this feature is partially explained by unaccounted changes in regime. Then, the forecasting (here as: f-g.) performance of Markov switching models is compared with that of an ARFIMA model. The results indicate that neglecting the break process is not important for very short term f-g. once it is allowed for a l-m. component in the model, but that superior forecasts can be obtained at longer horizons by modelling both l-m. and structural change. |
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