Construction of models for bounded price processes: the case of the HKD exchange rate
Citation
Yee, H.B. and Dokuchaev, N. 2015. Construction of models for bounded price processes: the case of the HKD exchange rate. Annals of Financial Economics. 10: Article ID 1550011.
Source Title
Annals of Financial Economics
ISSN
School
Department of Mathematics and Statistics
Collection
Abstract
This paper discusses construction of evolution models for financial time series evolving within a given interval. We calibrated a model for the case of the USD/HKD exchange rate after the separation of strong and weak side convertibility undertakings, in which the rate is confined to a specified corridor. This process represents an interesting example of a tradable bounded process. A 1D model was able to replicate the bounded distribution of the process, but a 2D model better captured dynamics as measured by the volatility without losing features of the 1D model. We briefly consider the ergodic properties of these models.
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