Journal article

Publication year: 2007

Pages: 125-145

Journal: Journal of Economic Interaction and Coordination

Volume number: 2

Issue number: 2

DOI Link: https://doi.org/10.1007/s11403-007-0020-4

Publisher: Springer

Abstract: 

The assessment of models of financial market behaviour requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent based microsimulation models, simulation based estimators might provide an alternative. In order to apply such techniques, an objective function is required, which should be based on robust statistics of the time series under consideration. Based on the identification of robust statistics of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. A bootstrap procedure is used to obtain an estimate of the variance-covariance matrix of the different moments included in the objective function, which is used as a base for the weighting matrix. Finally, the properties of the objective function are analyzed for two different agent based models of the foreign exchange market, a simple GARCH-model and a stochastic volatility model using the DM/US-$ exchange rate as a benchmark. It is also discussed how the results might be used for inference purposes.

Harvard Citation style: Winker, P., Gilli, M. and Jeleskovic, V. (2007) An objective function for simulation based inference on exchange rate data, Journal of Economic Interaction and Coordination, 2(2), pp. 125-145. https://doi.org/10.1007/s11403-007-0020-4

APA Citation style: Winker, P., Gilli, M., & Jeleskovic, V. (2007). An objective function for simulation based inference on exchange rate data. Journal of Economic Interaction and Coordination. 2(2), 125-145. https://doi.org/10.1007/s11403-007-0020-4