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Modelling South African Currency Crises As Structural Changes In The Volatility Of The Rand

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  • Andrew stuart Duncan
  • Guangling"dave" Liu

Abstract

This study tests the theory that currency crises are associated with sudden large changes in the structure of foreign exchange market volatility. Due to increases in market uncertainty, crisis periods exhibit abnormally high levels of volatility. By studying short-term changes in volatility dynamics, it is possible to identify the start and end dates of crisis periods with a high degree of precision. We use the iterative cumulative sum of squares algorithm to detect multiple shifts in the volatility of rand returns between January 1994 and March 2009. Dummy variables controlling for the detected shifts in variance are incorporated in a generalised autoregressive conditional heteroscedasticity modelling framework. The analysis indicates that previously identified crisis periods in the rand coincide with significant structural changes in market volatility. Copyright (c) 2009 The Authors. Journal compilation (c) 2009 Economic Society of South Africa.

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Bibliographic Info

Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 77 (2009)
Issue (Month): 3 (09)
Pages: 363-379

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Handle: RePEc:bla:sajeco:v:77:y:2009:i:3:p:363-379

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  1. Tobias Knedlik & Rolf Scheufele, 2008. "Forecasting Currency Crises: Which Methods Signaled The South African Crisis Of June 2006?," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 367-383, 09.
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Cited by:
  1. Duncan, Andrew S. & Kabundi, Alain, 2013. "Domestic and foreign sources of volatility spillover to South African asset classes," Economic Modelling, Elsevier, vol. 31(C), pages 566-573.
  2. Andrew S. Duncan & Alain Kabundi, 2011. "Volatility Spillovers across South African Asset Classes during Domestic and Foreign," Working Papers 202, Economic Research Southern Africa.

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