Title: Analysis of currency crises and exchange rate markets : Markov-switching based and vector auto-regression based approach
Authors: Yu, Runfang (喻潤方)
Abstract: With opening up and liberalization of international financial markets, the frequency of currency crises has risen and the impact of currency crises has become larger. Thus, exchange rate markets analysis has become increasingly more important. The research on currency crisis identification and exchange rate forecasting can not only reflect the inherent pattern of financial markets but can also provide beneficial information for market participants which include hedgers, speculators, arbitrageurs and regulators. On the other hand, as the RMB’s role in global markets is expanding and its internationalization has been accelerating, it has become quite necessary and interesting to investigate the relationship of different RMB markets. This thesis proposes three research topics and makes contributions as follows.
The first topic of my thesis is about investigation of ways of identifying and predicting currency crises in world-wide markets, with special focus on 1997 and 2008 currency crises. A novel Markov Switching method is proposed for identifying a crisis regime, based on different states. Compared with previous Markov switching currency crisis studies, this model is different in several ways. Firstly, the dependent variable is different. While other papers use the exchange rate directly or the estimation of devaluation probability, this thesis uses the market pressure index calculated from nominal exchange rate and foreign reserves. Secondly, we allow different volatilities in different states while other papers assume the same volatility in two states. Thirdly, our transition probabilities are constant rather than time-varying. The model shows evidence of state switching before crisis in many different currency markets. Moreover, we compare the Markov-switching method with the more usual probit model which proposed an early warning system in terms of forecasting performance and it is better significantly as the result shows.
The second topic of my thesis is about the exchange rate forecasting improvement. The thesis extends the traditional monetary model and the random walk model with Markov-switching method and proposes two new forecasting models called Markov switching monetary model (MSMM) and Markov switching random walk model (MSRW). Then we evaluate the forecasting ability of these two new mixed models, MSMM and MSRW, and compare their results with traditional pure monetary model and pure Random walk model. The research shows that the two new mixed models outperform the two usual models in most scenarios.
My third topic is about the inter-relationship between three RMB exchange rate markets, CNH (offshore Renminbi market), CNY (onshore Renminbi market) and NDF (Renminbi non-deliverable forward) exchange rate markets. We analyze the latest three years daily exchange rate data by Johansen co-integration test, vector auto-regression model and granger causality test. The results show that long run equilibrium relationship does exist between these three markets. NDF market influences both CNH and CNY severely. However, CNH and CNY exchange rate markets do not influence NDF market much. Besides, CNY can guide CNH while the opposite is not true.
To sum up, this thesis investigates three research topics, currency crisis identification, exchange rate forecasting improvement and RMB markets interrelationships. Based on Markov-switching model, some combinations of Markov-switching model with random walk and monetary model and Vector auto-regression model, some impressive results can be obtained. Of course, some future works and problems need to be pointed out. First, more complex Markov-Switching Models can be investigated in the future. For example, two regimes Markov switching model can be extended to three regimes Markov switching model or the time varying transition probability matrix can be tried in assumption settings of Markov switching model. Second, in order to make the empirical results more convincing, categories of target currencies should be augmented and not be limited to only two currencies, JPY and GBP.
Notes: CityU Call Number: HG3851.3 .Y8 2015; x, 128 pages : illustrations 30 cm; Thesis (Ph.D.)--City University of Hong Kong, 2015.; Includes bibliographical references (pages 122-128)
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