Predicting regime switching in BRICS currency volatility: a Markov switching autoregressive approach

Abstract

Empirical evidence on foreign exchange markets in emerging market economies shows changing volatility patterns. Using a univariate Markov regime switching model on daily data between April 2006 and March 2018, this paper identifies the turning points in volatility pattern in BRICS currency markets. The smoothed probability curves identify the phases of volatility during the period. Chinese Yuan is found to be the least volatile across regimes among BRICS currencies, whereas it is the highest for South African Rand. Such lower volatility in Chinese currency follows from higher intervention in the currency market by The People’s Bank of China, as is evident from the intervention index. The results have implications for exchange rate policy interventions, volatility transmission in foreign exchange markets and asset portfolio choices of emerging market economies.