Application of the threshold model for modelling and forecasting of exchange rate in selected ASEAN countries

Behrooz Gharleghi, Abu Hassan Shaari Md Nor, Tamat Sarmidi

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

Linear time series models are not able to capture the behaviour of many financial time series, as in the cases of exchange rates and stock market data. Some phenomena, such as volatility and structural breaks in time series data, cannot be modelled implicitly using linear time series models. Therefore, nonlinear time series models are typically designed to accommodate for such nonlinear features. In the present study, a nonlinearity test and a structural change test are used to detect the nonlinearity and the break date in three ASEAN currencies, namely the Indonesian Rupiah (IDR), the Malaysian Ringgit (MYR) and the Thai Baht (THE). The study finds that the null hypothesis of linearity is rejected and evidence of structural breaks exist in the exchange rates series. Therefore, the decision to use the self-exciting threshold autoregressive (SETAR) model in the present study is justified. The results showed that the SETAR model, as a regime switching model, can explain abrupt changes in a time series. To evaluate the prediction performance of SETAR model, an Autoregressive Integrated Moving Average (ARIMA) model used as a benchmark. In order to increase the accuracy of prediction, both models are combined with an exponential generalised autoregressive conditional heteroscedasticity (EGARCH) model. The prediction results showed that the construct model of SETAR-EGARCH performs better than that of the ARIMA model and the combined ARIMA and EGARCH model. The results indicated that nonlinear models give better fitting than linear models.

Original languageEnglish
Pages (from-to)1609-1622
Number of pages14
JournalSains Malaysiana
Volume43
Issue number10
Publication statusPublished - 1 Oct 2014

Fingerprint

Threshold model
Modeling
Exchange rates
Integrated
Moving average
Threshold autoregressive model
Time series models
Generalized autoregressive conditional heteroscedasticity
Structural breaks
Prediction
Regime-switching model
Structural change
Financial time series
Time series data
Currency
Nonlinearity test
Stock market
Market data
Break dates
Prediction model

Keywords

  • EGARCH
  • Exchange rate
  • Nonlinearity
  • SETAR

ASJC Scopus subject areas

  • General

Cite this

Application of the threshold model for modelling and forecasting of exchange rate in selected ASEAN countries. / Gharleghi, Behrooz; Md Nor, Abu Hassan Shaari; Sarmidi, Tamat.

In: Sains Malaysiana, Vol. 43, No. 10, 01.10.2014, p. 1609-1622.

Research output: Contribution to journalArticle

Gharleghi, Behrooz ; Md Nor, Abu Hassan Shaari ; Sarmidi, Tamat. / Application of the threshold model for modelling and forecasting of exchange rate in selected ASEAN countries. In: Sains Malaysiana. 2014 ; Vol. 43, No. 10. pp. 1609-1622.
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