An exchange rate model where the fundamentals follow a jump-diffusion process

This paper presents some models of exchange rate with jumps, namely jump diffusion models. Jump are quite common in computational and theoretical finance. It is known that rates sometimes exhibit jumps during time periods. Therefore, it important to take into account the presence these modeling general. However, even simplest model introduces analytical difficulty terms finding a solution model. The we analyze this make use Approximation Theory order come up closed form solutions underlying variables. approach leads branch differential equations called functional more specifically so-called delay equations. Our second equation. Though, principle, types can be solved analytically cases, task, general, enormous. We circumvent technical by deriving an approximate using power series expansion order. derive complete also investigate model’s predictions rate. introduce two first examines case where there constant magnitude. considers different sizes. These relatively simpler cases analyzed. will present aspects often encountered estimating increases for type being considered paper. Taking advantage specification have estimated parameters two-step M-estimation strategy combines full information maximum likelihood estimation step simulated method moments step.