Long-memory and heterogeneous components in high frequency Pacific-Basin exchange rate volatility

Recent research examining high-frequency financial data has suggested that volatility dynamics may be confounded by the existence of an intra-day periodic pattern and multiple sources of volatility. This paper examines whether these dynamics are present in the US Dollar exchange rates of five Pacific Basin economies. Using 30-min sampled returns, evidence of a ‘U’-shape intra-day pattern in volatility for regional markets is reported and controlled for using a Flexible Fourier transform. Supportive evidence for the existence of multiple volatility components is offered by semi-parametric fractional difference estimates of the long-memory properties of absolute exchange rate returns at various intra-day data sampling frequencies. Further parametric evidence of an explicit component structure in such high frequency exchange rate volatility is offered by the estimates of a component-GARCH model which comprises both a long-run volatility component exhibiting slow shock decay and a short-run volatility component exhibiting far more rapid decay, and provides a generally superior fit to the data. Further application of these C-GARCH models in the analysis of high frequency volatility spillovers between the currencies considered also reveals that such spillovers are predominantly transitory rather than highly persistent in nature, but that where volatility spillovers do impact on the long-run component of exchange rate volatility the Australian Dollar plays a pivotal role in the localised causality transmission mechanism.      

Volatility transmission in emerging European foreign exchange markets

This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold–Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.     

A cyclical model of exchange rate volatility

In this paper, we investigate the long run dynamics of the intraday range of the GBP/USD, JPY/USD and CHF/USD exchange rates. We use a non-parametric filter to extract the low frequency component of the intraday range, and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process. We use the cyclical volatility model to generate out-of-sample forecasts of exchange rate volatility for horizons of up to 1 year under the assumption that the long run trend is fully persistent. As a benchmark, we compare the forecasts of the cyclical volatility model with those of the range-based EGARCH and FIEGARCH models of Brandt and Jones (2006). Not only does the cyclical volatility model provide a very substantial computational advantage over the EGARCH and FIEGARCH models, but it also offers an improvement in out-of-sample forecast performance.     

Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence

We investigate interdependencies between stock returns and exchange rate changes for six industrialised countries, namely the US, the UK, Japan, Germany, France and Canada, by testing for volatility spillovers using a bivariate EGARCH model. Volatility spillovers from stock returns to exchange rate changes are found for all countries except Germany. These spillovers are symmetric in nature. No evidence is found of volatility spillovers from exchange rate changes to stock returns for any country. Spillovers from stock returns to exchange rate changes have increased since October 1987. This finding is consistent with the notion that international financial markets have become increasingly integrated.     

Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence

We investigate interdependencies between stock returns and exchange rate changes for six industrialised countries, namely the US, the UK, Japan, Germany, France and Canada, by testing for volatility spillovers using a bivariate EGARCH model. Volatility spillovers from stock returns to exchange rate changes are found for all countries except Germany. These spillovers are symmetric in nature. No evidence is found of volatility spillovers from exchange rate changes to stock returns for any country. Spillovers from stock returns to exchange rate changes have increased since October 1987. This finding is consistent with the notion that international financial markets have become increasingly integrated.     

Volatility spillover in the foreign exchange market: the Indian experience

We find evidence of significant volatility co-movements and/or spillover from different financial markets to the forex market in India. Among a large number of variables examined, volatility spillovers from domestic stock, government securities, overnight index swap, Ted spread and international crude oil markets to the foreign exchange market are found to be significant. There is evidence of asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis volatility indicate that the reform measures and changes in financial markets microstructure during the crisis period had significant impact on volatility spillover. During the post-crisis period, the lagged volatility component that represents persistent or fundamental changes had significant spillover effect on forex volatility, rather than the temporary shocks component. There is evidence of a decline in the asymmetric response in the forex volatility during the post-crisis period in India.     

Price and volatility spillovers between interest rate and exchange value of the US dollar

In this paper, the dynamic relationships between interest rate and exchange value of the US dollar are studied via a multivariate Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) model. In terms of price changes, movements of interest rates have positive effects on movements of exchange rates. However, changes in exchange rates do not explain changes in interest rates. Nevertheless, there exists volatility spillovers between the two markets, indicating that their second moments are related. Overall evidence suggests that these two markets have short-term dynamic interactions. The existence of volatility spillovers also suggests that the relationships between these two economic variables are not necessarily linear.     

VOLATILITY SPILLOVERS BETWEEN THE BLACK MARKET AND OFFICIAL MARKET FOR FOREIGN CURRENCY IN GREECE

The issue of volatility spillovers between the black and official exchange markets for U.S. dollars in Greece for 1975–89 is examined. A vector error correction‐bivariate EGARCH model is developed and estimated to capture potential asymmetric effects of innovations and volatility. During the period under investigation, reciprocal spillovers are found between the black and official exchange markets for dollars. Furthermore, spillovers are asymmetric in that bad news in one market has a greater effect on the volatility of the other market than good news. Additionally, the size of spillover effects is greater from the official market to the black market. Finally, the removal of the foreign exchange controls in January 1986 made the volatility of the official exchange rate higher and changed the nature of volatility spillovers between the two markets. JEL Classification: F31, F32     

The Stochastic Properties of Major Canadian Exchange Rates

This paper extends the results of Akgiray and Booth [2] on the stochastic properties of five major Canadian exchange rates using the EGARCH-M model along with the generalized error distribution (GED). In addition to the issue of first- and second-order dependencies, explored by the authors, the paper (1) addresses the issue of asymmetric volatility, (2) examines the extent to which volatility affects future movements in these exchange rates, (3) measures the amount of kurtosis in the data, and (4) investigates the transmission mechanism of innovations and volatility shocks across the five Canadian exchange rate markets. The five Canadian dollar exchange rates are for the U.S. dollar, the Japanese yen, the British pound, the German mark, and the French franc. Changes in Canadian exchange rates are conditionally heteroskedastic, a finding which is in line with that of Akgiray and Booth [2]. There is no evidence supporting the assertion that volatility triggers such changes. The hypothesis of asymmetric volatility is rejected for all Canadian exchange rates; thus unexpected appreciations and depreciations of the Canadian currency have similar impact on future volatility of these exchange rates. Innovations in the Canadian exchange rate markets for the U.S. dollar, the British pound, and French franc influence the Japanese yen market, while innovations in the markets of the British pound and German mark influence the French franc market. Significant but negative volatility spillovers radiate from the German mark market to the U.S. dollar market and from the French franc market to the German mark market, resulting in lower levels of volatility in both the U.S. and German markets. The distributions of all five series of Canadian exchange rates are highly leptokurtic relative to the normal distribution. The GED distribution provides a good characterization of these distributions.     

Exchange return co-movements and volatility spillovers before and after the introduction of euro

This paper examines return co-movements and volatility spillovers between major exchange rates before and after the introduction of euro. Dynamic correlations and VAR-based spillover index results suggest significant return co-movements and volatility spillovers, however, their extend is, on average, lower in the post-euro period. Co-movements and spillovers are positively associated with extreme episodes and US dollar appreciations. The euro (Deutsche mark) is the dominant net transmitter of volatility, while the British pound the dominant net receiver of volatility in both periods. Nevertheless, cross-market volatility spillovers are bidirectional, and the highest spillovers occur between European markets.     

Dynamic relationship between exchange rate and stock price: Evidence from China

The paper empirically analyzes the dynamic relationship between Renminbi (RMB) real effective exchange rate and stock price with VAR and multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models using monthly data from January 1991 to June 2009. The results show that there is not a stable long-term equilibrium relationship between RMB real effective exchange rate and stock price. There are also not mean spillovers between the foreign exchange and stock markets. Furthermore, the paper examines the cross-volatility effects between foreign exchange and stock markets using likelihood ratio statistic. There exist the bidirection volatility spillovers effects between the two markets, indicating the past innovations in stock market have the great effect on future volatility in foreign exchange market, and vice versa.     

Exchange rates and FDI strategies of multinational enterprises

We examine the role of both the volatility and levels of exchange rates in the determination of multinational enterprises’ (MNEs) investments using a unique Korean dataset. These data provide a natural laboratory due to the Korean experience of a severe financial crisis in the late nineties. We find, first, that the behavior of foreign investors in Korea has changed following the 1997 crisis. The change in foreign direct investment (FDI) in response to exchange rate volatility is robust, while that to exchange rate level is quite mixed, which is consistent with recently developed real option-based FDI theory. Second, the effect of exchange rate volatility on FDI is persistent, whereas that of misalignment of level is only temporary, suggesting that MNEs regard volatility as a more generic determinant of foreign investment than misalignment of the exchange rate level. Third, we find strong evidence of nonlinearity between uncertainty and FDI, which may shed some light on why existing literature shows mixed results on the relation between exchange rate variables and FDI.     

Volatility returns with vengeance: Financial markets vs. commodities

To assess how financial markets and commodities are inter-related, this paper introduces a ‘volatility surprise’ component into the asymmetric DCC with one exogenous variable (ADCCX) framework. We develop an econometric model in which returns and volatility allow to influence pairs of assets, and derive several case studies linking commodities to stocks, bonds and currencies from 1983 to 2013. The innovative feature of our model is that these volatility spillovers are modeled consistently within the correlation dynamics of the ADCCX. We find evidence that return and volatility spillovers do exist between commodity and financial markets and that in turn, their relative impact on each other is very substantial.     

Taylor rules and the Canadian–US equilibrium exchange rate

This paper identifies the Canadian–US equilibrium exchange rate based on a simple structural model of the real exchange rate, in which monetary policy follows a Taylor-rule interest rate reaction function. The exchange rate is explained by relative output and inflation as observable variables, and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974–2009 we jointly estimate the unobserved components and the structural parameters using the Kalman filter and Bayesian technique. We find that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate, resulting in few but prolonged periods of currency misalignments.     

Asymmetric volatility connectedness on the forex market

We show how bad and good volatility propagate through the forex market, i.e., we provide evidence for asymmetric volatility connectedness on the forex market. Using high-frequency, intra-day data of the most actively traded currencies over 2007–2015 we document the dominating asymmetries in spillovers that are due to bad, rather than good, volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the positive asymmetries in volatility spillovers, while fiscal factors are linked with negative spillovers.     

Exchange rate determination and inter-market order flow effects

The dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, EUR/USD, EUR/GBP, GBP/USD and USD/JPY, across sampling frequencies ranging from 5 min to 1 week. Strong explanatory power is discovered for all sampling frequencies. We also uncover cross-market order flow effects, e.g. GBP exchange rates are very strongly influenced by EUR/USD order flow. We proceed to investigate the predictive power of order flow for exchange rate changes, and it is shown that the order flow specifications reduce RMSEs relative to a random walk for all exchange rates at high-frequencies and for EUR/USD and USD/JPY at lower sampling frequencies.     

外汇风险传染网络测度与影响机制分析--基于静态和动态的双重视角

国际争端频发及不确定性风险增加的外部环境,叠加经济下行压力增大的内部环境,致使汇率波动变得更加敏感,外汇风险传染危害性提升。基于1999-2018年全球50种主要货币,本文引入复杂网络模型以及静态与动态两类相关系数算法,分析了汇率网络的总体关联性及各货币风险吸收效应和外溢效应。同时,本文采用混合效应面板回归研究了资本账户开放、汇率制度改革等政策因素的作用,在此基础上,分析了外汇风险传染的影响机制。研究发现,考察期内,各货币波动溢出比收益率溢出更平稳,收益率溢出关系稳定性相对较弱、变动幅度更大,这与金融危机和欧债危机爆发有关。全球主要货币总体关联性具有明显的时变特征和区制特征,且波动溢出与收益率溢出存在区制同步性。资本账户开放和汇率制度是外汇风险传染的重要影响因素,汇率市场化改革有助于缓释外汇风险传染,而资本账户开放将扩大外汇风险传染效应。     

Conditional volatility persistence and volatility spillovers in the foreign exchange market

I investigate the magnitudes and determinants of volatility spillovers in the foreign exchange (FX) market, using realized measures of volatility and heterogeneous autoregressive (HAR) models. I confirm both meteor shower effects (i.e., inter-regional volatility spillovers) and heat wave effects (i.e., intra-regional volatility spillovers) in the FX market. Furthermore, I find that conditional volatility persistence is the dominant channel linking the changing market states of each region to future volatility and its spillovers. Market state variables contribute to more than half of the explanatory power in predicting conditional volatility persistence, with the model that calibrates volatility persistence and spillovers conditionally on market states performing statistically and economically better. The utilization of market state variables significantly extends our understanding of the economic mechanisms of volatility persistence and spillovers and sheds new light on econometric techniques for volatility modeling and forecasting.     

Dynamic spillovers between commodity and currency markets

In this study, we examine the dynamic link between returns and volatility of commodities and currency markets. Based on weekly data over the period from January 6, 1987 to July 22, 2014, we find the following empirical regularities. First, our results suggest that the information contents of gold, silver, platinum, and the CHF/USD and GBP/USD exchange rates can help improve forecast accuracy of returns and volatilities of palladium, crude oil and the EUR/CHF and GBP/USD exchange rates. Second, gold (CHF/USD) is the dominant commodity (currency) transmitter of return and volatility spillovers to the remaining assets in our model. Third, the analysis of dynamic spillovers shows time- and event-specific patterns. For instance, the dynamic spillover effects originating in gold and silver (platinum) returns and volatility intensified (degraded) in the period marked by the global financial crisis. After the global financial crisis, the net transmitting role of gold and silver (platinum) returns shocks weakened (strengthened), while the net transmitting role of gold, silver and platinum volatility shocks remained relatively high. Overall, our findings reveal that, while the static analysis clearly classifies the aforementioned variables into net transmitters and net receivers, the dynamic analysis denotes episodes wherein the role of transmitters and receivers of return (volatility) spillovers can be interrupted or even reversed. Hence, even if certain commonalities prevail in each identified category of commodities, such commonalities are time- and event-dependent.     

Return and volatility spillovers between currency and bond markets in India

This paper examines the return and volatility spillovers between the foreign exchange and bond markets of India using a bivariate asymmetric BEKK-GARCH (1,1) model for the period 4 April 2005 to 31 March 2017. We find the evidence of bidirectional return and volatility spillovers with asymmetric effects between these two markets. The spillovers are evidenced even during the periods when foreign portfolio investments in the Indian bond markets were relatively low suggests the existence of strong inter-linkages between both the markets.