Contents

A Utility-Based Comparison of Some Models of Exchange Rate Volatility

West, Kenneth D. / Edison, Hali J. / Cho, Dong Chul

Abstract

When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonpararnetric models for the conditional variance of each exchange rate, GARCI-J models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.

Issue Date
1993
Publisher
ELSEVIER SCIENCE BV
Citation
JOURNAL OF INTERNATIONAL ECONOMICS, v.35, no.1-2, pp.23 - 45, 1993
URL
http://www.nber.org/papers/t0128
DOI
10.3386/t0128
Journal Title
JOURNAL OF INTERNATIONAL ECONOMICS
Start Page
23
End Page
45
ISSN
0022-1996
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