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Effect of exchange rate return on volatility spill-over across trading regions

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  • Galagedera, Don U.A.
  • Kitamura, Yoshihiro

Abstract

This paper examines the effect of realized exchange rate returns on the volatility spill-over between the euro–US dollar and US dollar–yen currency pairs across the five trading regions: Asia, Asia–Europe overlap, Europe, Europe–America overlap and America. Modelling the interaction between returns and volatility in an autoregressive five-equation system, we find evidence that depreciation of the US dollar against the yen has a greater impact on the US dollar–yen volatility spill-over than appreciation in the subprime crisis period. Appreciation and depreciation of the US dollar against the euro does not appear to have an asymmetric effect on the euro–US dollar volatility spill-over. Our results support the notion that the yen may have been preferred to the euro as a ‘safe-haven’ currency relative to the US dollar during the subprime crisis period.

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Bibliographic Info

Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 24 (2012)
Issue (Month): 4 ()
Pages: 254-265

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Handle: RePEc:eee:japwor:v:24:y:2012:i:4:p:254-265

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Web page: http://www.elsevier.com/locate/inca/505557

Related research

Keywords: Exchange rate; Volatility spill-over; High-frequency data;

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  1. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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  3. Dacorogna, Michael M. & Muller, Ulrich A. & Nagler, Robert J. & Olsen, Richard B. & Pictet, Olivier V., 1993. "A geographical model for the daily and weekly seasonal volatility in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 413-438, August.
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  6. Ito, Takatoshi & Hashimoto, Yuko, 2006. "Intraday seasonality in activities of the foreign exchange markets: Evidence from the electronic broking system," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 637-664, December.
  7. David Berger & Alain Chaboud & Erik Hjalmarsson & Edward Howorka, 2006. "What drives volatility persistence in the foreign exchange market?," International Finance Discussion Papers 862, Board of Governors of the Federal Reserve System (U.S.).
  8. Cai, Fang & Howorka, Edward & Wongswan, Jon, 2008. "Informational linkages across trading regions: Evidence from foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1215-1243, December.
  9. Engle, Robert F & Ito, Takatoshi & Lin, Wen-Ling, 1990. "Meteor Showers or Heat Waves? Heteroskedastic Intra-daily Volatility in the Foreign Exchange Market," Econometrica, Econometric Society, vol. 58(3), pages 525-42, May.
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