Medium-term macroeconomic determinants of exchange rate volatility
AbstractIs there a short- to medium-term linkage between macroeconomic and exchange rate volatility? This paper provides a clear-cut answer to the above question, pointing to significant linkages and trade-offs between macroeconomic and exchange rate volatility, particularly involving output volatility. Evidence of bidirectional causality is also found, with macroeconomic volatility showing a stronger causal power than exchange rate volatility. Many tasks in finance, such as option pricing, risk analysis, and portfolio allocation, rely on the availability of good forecasting models. The paper points to new directions for the construction of improved medium-term volatility models.
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Bibliographic InfoArticle provided by Capco Institute in its journal Journal of Financial Transformation.
Volume (Year): 25 (2009)
Issue (Month): ()
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exchange rate volatility; macroeconomic volatility; fractional integration; structural breaks;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
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