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Common stochastic volatility trend in European exchange rates

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  • David McMillan

Abstract

This paper examines the nature of stochastic volatility in the deutschemark/dollar and French franc/dollar exchange rates. In particular using a multivariate random walk stochastic volatility model the study examined whether volatility in each series can be ascribed to a single common trend. Results for univariate stochastic volatility models show very high persistence in the autoregressive component of volatility supporting the model specification where volatility follows a random walk. Estimation of the multivariate model reveals a very high correlation between the volatility innovations, and suggests that they follow a common trend, in essence the volatilities are cointegrated. A multivariate model with a single volatility trend is then estimated. Finally, support for this specification is further received when estimation of a stochastic volatility model for the ratio of the two series reveals no stochastic volatility present.

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  • David McMillan, 2001. "Common stochastic volatility trend in European exchange rates," Applied Economics Letters, Taylor & Francis Journals, vol. 8(9), pages 605-608.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:9:p:605-608
    DOI: 10.1080/13504850010023099
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    2. Mohamadou L. Fadi & Yongsheng Wang, 2014. "Common Stochastic Volatility in International Real Estate Market," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 131-139.

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