Volatility regime-switching in European exchange rates prior to monetary unification
AbstractSeveral theoretical models suggest that the mere announcement of entering a currency union in the future triggers instantaneous changes in exchange-rate volatility. First, this paper develops a Markov-switching framework by which, in fact, volatility regime-switching in foreign exchange rates can be detected for all currencies in the run-up to the European Monetary Union (EMU). Second, the paper attributes the currency-specific volatility regime-switches to decisive economic, institutional and political factors prior to EMU. All in all, the empirical results suggest that for future EMU accession countries volatility regime-switching models provide a useful tool for a broad range of financial applications (e.g. for the pricing of currency options or for the construction of EMU probability calculators).
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 28 (2009)
Issue (Month): 2 (March)
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Web page: http://www.elsevier.com/locate/inca/30443
EMU Exchange-rate volatility Markov-switching volatility modeling EMU uncertainty;
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