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Neglected common factors in exchange rate volatility

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Author Info

  • Mahieu, Ronald
  • Schotman, Peter

Abstract

The paper proposes a new multivariate model for exchange rate volatility in a system of bilateral exchange rates, using a factor structure of exchange rates one of the common factors is always related to the numeraire currency. Time variation in the volatility is modelled using a stochastic variance approach. The interpretation of the factors provides a new way of estimating risk premia in the foreign exchange market. Empirical results show considerable volatility spillovers among the four major currencies. Risk premia show a major sign reversal for the dollar risk premium around 1978.

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File URL: http://www.sciencedirect.com/science/article/B6VFG-45JK707-9/2/21a71d6b7fbaa9e4f8c844534e8d8bc3
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 1 (1994)
Issue (Month): 3-4 (July)
Pages: 279-311

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Handle: RePEc:eee:empfin:v:1:y:1994:i:3-4:p:279-311

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Web page: http://www.elsevier.com/locate/jempfin

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  1. Geert Bekaert & Robert J. Hodrick, 1991. "On Biases in the Measurement of Foreign Exchange Risk Premiums," NBER Working Papers 3861, National Bureau of Economic Research, Inc.
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