Regime Switching Regression Model for Exchange Rate Return(Practice,<Special Topics>Activity Group "Mathematical Finance")

Abstract

This research first discuss regression model (uncovered interest parity model) to forecast $/Yen exchange rate change by international interest-spread. Second, incorporating international monetary base in addition to the international interest-spread, we extend the model and compare the performance of the two models. Regarding the regression model, we adopt regime-switching regression model so as to flexibly estimate the coefficients of international interest-spread and international monetary base depending on the economic state.