Monitoring Exchange Rates by Statistical Process Control

Abstract: The exchange rate market has traditionally played a key role in the financial market. The variation of the exchange rate which is called volatility is also an important feature for studying the exchange rate market because the increased volatility may have a negative effect on a nation's economy by increasing the uncertainty in the exchange market. In this paper the volatility of the exchange rate is considered by means of a Heterogeneous Autoregression Conditional Heteroskedastictity (HARCH) Model. It explains the volatility of the exchange rate market well. In addition, it is assumed that at a random time point a change of a parameter in the distribution of the random process underobservation may occur. Some methods such as the Shewhart method, the Culumative Sum Method (CUSUM) and the ExponentiallyWeighted Moving Average Method (EWMA) are investigated within the frames of this change-point problem. In order to evaluate them, Average Run Length (ARL) and Conditional Expected Delay (CED) will be used asperformance measures.