CPR Working Paper Series No. 35

 Some New Approaches to Formulate and Estimate Friction-Bernoulli Jump Diffusion and Friction-GARCH

Chihwa Kao

February 2001

Abstract:  In this paper we propose a friction model with a Bernoulli jump diffusion and a friction with GARCH to examine the exchange rates movements in Taiwan.  The proposed models resolves the estimation problem associated with the stepwise movements of observed exchange rates. The specification maintains the desirable economic properties associated with movements in exchange rate returns and is empirically tractable.  The AIC apparently favors the model based on Friction-GARCH model.

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