Retrospective Theses and Dissertations
1997
Statistical analysis of foreign exchange rates: application of cointegration model and regimeswitching stochastic volatility model Koji Kondo Iowa State University
Follow this and additional works at: http://lib.dr.iastate.edu/rtd Part of the Economics Commons, and the Statistics and Probability Commons Recommended Citation Kondo, Koji, "Statistical analysis of foreign exchange rates: application of cointegration model and regime-switching stochastic volatility model " (1997). Retrospective Theses and Dissertations. Paper 11998.
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Statistical analysis of foreign exchange rates: Application of cointegration model and regime-switching stochastic volatility model by Koji Kendo
A dissertation submitted to the graduate faculty in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY
Co-majors: Economics; Statistics Major Professors: Stefano Athanasoulis auid F. Jay Breidt
Iowa State University Ames, Iowa 1997 Copyright © Koji Kondo, 1997. All rights reserved.
DMI Number: 9814658
Copyright 1997 by Kondo, Koji All rights reserved.
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TABLE OF CONTENTS
1
GENERAL INTRODUCTION
1
PART I COINTEGRATION ANALYSIS OF EXCHANGE RATES
3
2
INTRODUCTION
4
3
MONETARY APPROACH TO THE EXCHANGE RATE
6
3.1 The Monetary Approach 3.1.1 The Flexible Price Monetary Model 3.1.2
The Sticky Price Moneteiry Model
3.1.3 The Real Interest Differential Model 3.2 The Currency Portfolio Approach
4
7 10 12 13
THE DORNBUSCH STICKY PRICE MODEL: LARGE-COUNTRY CASE
17
4.1 Two-Country Case
17
4.1.1 The Money Markets
18
4.1.2 The Goods Markets
18
4.2 Three-Country Case
5
6
21
4.2.1 The Money Markets
21
4.2.2 The Goods Markets
21
ERROR CORRECTION MODEL (ECM)
25
5.1 Vector Autoregression Model
25
5.2 Identification Issues
27
5.3 Estimation
27
5.4 Hypothesis Testing
29
5.5
32
Error Correction Model (ECM)
IV
6
5.5.1
Weak Exogeneity
35
5.5.2
Pjirtial System Model
36
THE DATA DESCRIPTIONS
38
6.1 Data Descriptions
38
6.2 Unit Root Tests
39
6.2.1
Practical Procedures
44
6.3 Some Empirical Results
7
45
6.3.1
Germany
45
6.3.2
Japzin
48
6.3.3
The United States
51
EMPIRICAL RESULTS: COINTEGRATION ANALYSIS
55
7.1 Other Empirical Researches
57
7.2 Cointegration Analysis: Two-Country Case
60
7.2.1
Germjmy-U.S
60
7.2.2
Japein-U.S
67
7.3 Cointegration Analysis; Three-Country Case 7.3.1 8
72
Germany-Japein-U.S
72
SHORT-RUN DYNAMIC ANALYSIS
82
8.1 Varieince Decomposition Analysis
82
8.1.1
Germany-U.S
82
8.1.2
Japam-U.S
85
8.1.3
Germamy-Japan-U.S
86
8.2 Impulse Response Andysis
9
91
8.2.1
Germany-U.S
92
8.2.2
Japan-U.S
96
8.2.3
Germany-Japan-U.S
100
CONCLUSION
PART II
109
APPLICATION OF REGIME-SWITCHING STOCHASTIC
VOLATILITY MODEL TO EXCHANGE RATES 10 INTRODUCTION
112 113
V
11 TIME-VARYING VARIANCE MODELS
115
11.1 ARCH Model
115
11.2 Generalized ARCH Model
118
11.3 Estimation Methods
118
11.3.1 Maximum Likelihood Method
118
11.3.2 Quasi-Maximum Likelihood Method
120
11.3.3 Generalized Method of Moments
121
11.4 Stochastic Volatility Model
122
11.5 Estimation Methods
125
11.5.1 Method of Moments
125
11.5.2 Quasi-Maximum Likelihood Method
127
12 REGIME-SWITCHING STOCHASTIC MODEL
129
12.1 An Extension of Schmidt's Model
129
12.1.1 Conditional Distribution of the Transition Probability
132
12.1.2 Conditional Distribution of the State Vector
133
12.1.3 Conditional Distribution of 0
134
12.1.4 Conditionad Distribution of
