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Portfolio Performance of the SDR and Reserve Currencies: Tests Using the ARCH Methodology

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  • Michael G. Papaioannou

    (International Monetary Fund)

  • Tugrul Temel

    (International Monetary Fund)

Abstract

In evaluating their foreign exchange exposure, international investors often compare actual portfolios with those calculated under the assumption that the variability of returns on various currency assets is time invariant. This paper uses autoregressive conditional heteroskedastic (ARCH) models to test that assumption. For major reserve currencies, including the SDR, we find evidence that the variances of returns do vary over time and that ARCH models that specify changing variances are superior to models that assume constant variance. By incorrectly assuming a constant variability of returns, the error introduced is smaller with the SDR than with any other national currency.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 40 (1993)
Issue (Month): 3 (September)
Pages: 663-679

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Handle: RePEc:pal:imfstp:v:40:y:1993:i:3:p:663-679

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Cited by:
  1. Lam, K. & Chang, E. & Lee, M. C., 2002. "An empirical test of the variance gamma option pricing model," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 10(3), pages 267-285, June.
  2. Shively, Gerald E., 2001. "Price thresholds, price volatility, and the private costs of investment in a developing country grain market," Economic Modelling, Elsevier, Elsevier, vol. 18(3), pages 399-414, August.

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